Exhibit III Practical examples
A Limited Liability Company tax resident in Spain (Teleco, S.L.) is engaged in the supply of telecommunications services. According to the 2023 financial statements, the company obtained a profit per books of €7,225,000. The company has recorded in its accounts the following transactions which may give rise to the need to make the relevant tax adjustments to the income per books:
- Teleco, S.L. has its offices in a rented building, and pays to the owner of that building an annual amount in this respect of €200,000. In addition, the company owns a building, which has been rented to a third party. The rental income obtained by Teleco, S.L. amounted to €100,000, and the withholding taxes borne by it amounted to €20,000.
- The company has recorded a CIT expense amounting to €2,167,500.
- The company recorded a provision for impairment losses in relation to foreseeable bad debts amounting to €170,000. Of that amount, €125,000 relate to accounts receivable less than six months past-due on the date on which the CIT relating to that year fell due.
- Teleco, S.L. purchased certain software on July 1 of the previous year, for €600,000. This tax period it recorded an amortization expense for that software amounting to €300,000.
- In the previous tax period the company recorded a provision for impairment losses in relation to foreseeable bad debts amounting to €350,000, relating to accounts receivable two months past-due at the date on which the CIT relating to that year accrued.
- The company recorded a provision for other expenses (provision for incentives to be paid after 3 years) in the amount of €225,000 to cover the expense to be incurred in relation to the bonus payable to employees.
- In 2013 and 2014, it made adjustments in relation to the limit on the deductibility of amortization, for the amount of €20,000.
- The company purchased some computers on October 1, 2017 amounting to €60,000. In this tax period it recorded a depreciation expenses totaling €20,000 in relation to those computers.
- The company incurred expenses on scientific R&D in the amount of €620,000 during the year. The average expenses incurred in the previous two years amounted to €120,000.
- The company purchased shares in certain companies. In this connection, the company obtained dividends in a gross amount of €105,000, and bore withholding taxes in the amount of €21,000. Such shares were acquired by February 15 and transferred by the end of March.
- According to the information furnished by the company, tax installment payments were made during the tax period in the amount of €2,400,000.
| Income for the year | 7,225,000 |
| POSITIVE ADJUSTMENTS | |
| Corporate income tax expense 2020 | 2,167,50061 |
| Provision for impairment losses on receivables | 125,00062 |
| Excess amortization of software | 102,00063 |
| Excess depreciation of computers | 5,00064 |
| Provision for incentives | 225,00065 |
| NEGATIVE ADJUSTMENTS | |
| Provision for impairment losses on receivables recorded in the previous tax year | <350,000>66 |
| Reversal of 30% adjustment to amortization/depreciation | <2,000>67 |
| Tax base | 9,497,500 |
| Tax rate | 25% |
| Gross tax payable | 2,374,375 |
| DEDUCTIONS | |
| Investments in R&D | <240, 000>68 |
| Deduction of reversal of adjustment to amort/depr. | <100>69 |
| Net tax payable | 2,134,275 |
| Minimum net tax payable70 | 1,424,625 |
| Withholdings and prepayments | |
| Withholdings on dividends | <21,000> |
| Withholdings on rental income | <20,000> |
| Tax installments payments | <2,400,000> |
| Net amount refundable | <306,725> |
61 As stated previously, the CIT expense is nondeductible.
62 As this amount is less than 6 months old on the date when the tax falls due, it is deemed a nondeductible expense.
63 The maximum depreciation of software is €198,000 per year (33% of the acquisition cost). Consequently, as the depreciation for accounting purposes is higher than for tax purposes, a positive adjustment must be made for the difference (€102,000).
64 The maximum depreciation of data processing equipment is €15,000 per year (25% of the acquisition cost). Consequently, as the depreciation for accounting purposes is higher than for tax purposes, a positive adjustment must be made for the difference (€5,000).
65 The provision for long-term incentives for personnel who will presumably leave the company is a nondeductible expense.
66 This expense becomes deductible once it is more than 6 months old.
67 The tax provision permits reversing the adjustments made in fiscal years 2013 and 2014 due to the limitation on the deductibility of the amortization/depreciation recorded. Given that the total positive adjustment for this item amounted to €20,000, and the period for reversing it is 10 years, a negative adjustment must be made to the book income for one-tenth of the positive adjustment made in the past, that is, €2,000 (20,000 x 10%).
68 As the R&D expense of the year is higher than the average incurred in the last two years, the deduction rate applicable is 42%, the deduction totaling €240,000 (120,000 x 25% + 500,000 x 42%). It is necessary to verify that this deduction does not exceed 25% of the gross tax payable reduced by domestic and international double taxation tax credits and reductions. However, this limit goes up to 50% when the amount of the R&D tax credit, relating to expenses and investments made in the same tax period, exceeds 10% of the gross tax payable, reduced by domestic and international double taxation tax credits and reductions. In this case, the limit is €1,434,510 (the limit is 50% because the R&D expenses of the year exceed 10% of the gross tax payable), and thus the tax credit can be taken in full.
69 The current CIT Law has establishes, for taxpayers to which the 70% limit on the tax deductibility of accounting amortization/depreciation applied, the right to take an additional deduction of 2% in fiscal year 2015 (5% starting in 2016) of the amount included in the tax base (2,000 x 5%).
70 Effective for tax periods starting on or after January 1, 2022, the net tax payable cannot be less than the minimum net tax, that is, 15% of the tax base, reduced or increased by the amounts derived from the levelling reserve and/or reduced by the Canary Island investment reserve, as appropriate.
