A Comprehensive Guide to Corporate Income Tax in Spain

Posted on Jul 5, 2024 in Economy

1. General Concepts

1.1 What is Corporate Income Tax?

In Spain, legal entities such as companies, associations, and foundations fulfill their constitutional obligation to contribute through Corporate Income Tax (IS). The IS is regulated by Royal Decree 4/2004 of March 5, approving the revised text of the Income Tax Act (hereinafter TRLIS), and Royal Decree 1777/2004, of July 30, on the Council’s Rules (the RIS).

Article 1 of the TRLIS defines the IS as a direct and personal tax levied on the income of corporations and other legal entities.

1.2 Scope

The tax is levied throughout Spain. However, the application is not uniform due to special arrangements in certain territories. These include the economic agreement with the Basque Country, Navarra, and the agreements with the Canary Islands, Ceuta, and Melilla.

1.3 Taxable Event

Definition

The TRLIS states that obtaining income, regardless of its source, by the taxpayer constitutes a taxable event for Corporate Income Tax.

Presumption of Onerous Transactions

The TRLIS stipulates that transfers of assets and rights are presumed to be paid at their market value unless proven otherwise.

1.4 Liable Entities

IS applies to “legal persons and other civil societies.” Legal status is the determining factor for tax liability under IS. However, some entities lack legal personality (e.g., civil societies) while others have special rules (e.g., investment funds, joint ventures, venture capital funds, pensions). For instance, civil societies, despite having legal personality, are not liable for IS, while investment funds, without legal personality, are.

Income obtained by resident entities in Spain is taxed under IS, while income obtained by non-resident entities is taxed under IRNR (Non-Resident Income Tax).

Article 8 of the revised IS Law considers entities as residents in Spain if they meet the following requirements:

• Incorporated under Spanish law.
• Established in Spanish territory.
• Having their place of effective management in Spanish territory.

1.5 Exemptions

An exemption is a tax benefit that prevents the generation of tax liability, even if the taxpayer engages in activities described as taxable events by the legislation.

1.6 Tax Period and Accrual

The TRLIS states that the tax base “shall be the amount of income in the tax period.” The tax period corresponds to the entity’s fiscal year, not exceeding 12 months. The chargeable event, i.e., the birth of the tax liability, is the last day of the tax period.

1.7 Settlement Scheme

The settlement scheme for Corporate Income Tax is as follows:

2. Tax Base and Depreciation

2.1 Tax Base

The TRLIS states that the tax base “shall be the amount of income in the tax period, less any tax losses from previous years.”

The taxable amount for IS is generally determined under direct estimation, meaning taxable income less deductible expenses.

After preparing the income statement, the tax base is adjusted according to the TRLIS. If an expense recorded in accordance with the General Accounting Plan and other regulations is not tax-deductible, a positive adjustment is made, increasing the taxable income. Conversely, if the tax law allows for a higher deductible expense or a lower attributable income than recorded, a negative adjustment is made to reduce the tax base.

2.2 Depreciation

Deductible amounts, in the form of depreciation for tangible, intangible, and real estate investments, correspond to the actual depreciation suffered by assets due to use, obsolescence, etc., within established limits.

Depreciation is an expense, and without regulations, firms could inflate this expense, minimizing their tax liability. Therefore, depreciation amounts must adhere to specific rules:

2.2.1 Depreciation Tables

This general principle involves applying depreciation rates set by officially approved tables listed in the annex to the RIS.

These tables specify a maximum straight-line depreciation rate and a maximum repayment period for each asset. Effective depreciation is achieved by applying either of these rates or any rate derived from them.

2.2.2 Repayment of Elements Used in Multiple Shifts

This special case within the depreciation system addresses situations where tangible assets are used in more than one normal work shift.

The RIS provides an alternative for calculating a new maximum rate. When an asset is used in multiple shifts per day, the applicable depreciation rate is calculated as follows:

• The minimum rate from the official tables (derived from the maximum repayment period).
• The difference between the maximum and minimum straight-line rates, multiplied by the ratio of hours worked exceeding eight hours.