Business Finance Essentials: Tax, Assets, and Accounting

Posted on Jul 20, 2025 in Accounting and Finance

Corporate Income Tax (CIT) Essentials

1. Understanding Corporate Income Tax (CIT)

Corporate Income Tax (CIT) is a direct tax that taxes the economic ability (profits) of a company. It is periodic, calculated at the end of the fiscal year, and proportional, with a flat tax rate of 25% (general). CIT is also linked to accounting, starting from the accounting result (EBT) and adjusting it using tax rules.

2. Scope of Corporate Income Tax

CIT applies in all of Spain, with the following exceptions:

• Special Regimes: Basque Country (País Vasco), Navarra, Canary Islands, Ceuta, Melilla.
• International Treaties override local rules.

3. Who Pays Corporate Income Tax? (Taxpayer)

A company is considered resident in Spain if it meets any of these criteria:

• Incorporated under Spanish law.
• Registered office in Spain.
• Effective management in Spain.

CIT also includes some non-legal entities (e.g., funds, joint ventures).

4. CIT Tax Year and Accrual Principles

Standard Tax Year: 12 months (can be shorter).

Accrual: The last day of the fiscal year.

The tax year may shorten if a company disappears, changes legal form, or moves its office abroad.

5. Corporate Income Tax Exemptions

Total Exemption from CIT Submission

• State, public institutions (e.g., RTVE, Bank of Spain)

Partial Exemption from CIT

• NGOs, Foundations, Political Parties, Professional Associations

6. Corporate Income Tax Calculation Steps

1. Start with Accounting Profit (EBT)
2. Apply Adjustments:
   • Permanent Differences (never reverse): e.g., fines, donations → + Adjustment
   • Temporary Differences (reverse later): e.g., depreciation differences
3. Result: Previous Tax Base
4. Apply Reductions:
   • Capitalization Reserve: 10% × equity increase (held 5 years)
   • Negative Tax Bases (NTB): Offset past losses (limit: 70% of tax base/year)
5. Determine the Tax Base
6. Apply the Tax Rate (25%)

   → Gross Tax Due

7. Subtract Deductions (e.g., R&D, job creation)

   → Adjusted Gross Tax Due

8. Subtract Prepayments (already paid)

   → Net Tax Due

Key Formula Chain for CIT Calculation

EBT

± Adjustments (permanent & temporary)

= Previous Tax Base

– Reductions (reserves, NTBs)

= Tax Base

× 25%

= Gross Tax Due

– Deductions

– Prepayments

= Total Tax Liability

Assets and Accounting Treatments

1. Non-Financial Assets

Tangible Assets

Physical assets used in company operations (e.g., buildings, machines).

Initial Value = Purchase Price – Discounts + Necessary Costs (e.g., transport, installation).

If produced by the company, the value equals Production Cost.

Investment Property

Tangible assets held for rental income (not operational use).

Intangible Assets

Non-physical assets: software, patents, goodwill, websites, etc.

Must be:

• Identifiable
• Measurable
• Generate future benefits

Initial Value: Purchase cost + Legal/registration costs.

2. Depreciation and Impairment

Depreciation (Non-Reversible)

Loss of asset value due to time, use, or obsolescence.

Reflected as:

• Expense in Profit & Loss (P&L)
• Decrease in asset value in the balance sheet

Formula:

Depreciation = (Cost – Residual Value) / Useful Life (years)

Impairment (Reversible)

Loss of recoverable value (e.g., land drops in value).

Can be reversed if the asset recovers.

Adjusted by comparing:

• Book Value
• Recoverable Value = higher of (Fair Value – Costs to sell) OR (Value in use)

3. Write-off of Assets

Happens when the asset is sold or scrapped.

Gain or loss is calculated as:

Gain/Loss = Proceeds – Book Value

4. Inventories

Items held for sale or production.

Types:

• Raw Materials
• Finished Goods
• Work in Progress

Valuation: Lower of:

• Purchase/production cost
• Net Realisable Value (NRV) = estimated sale price – selling costs

5. Leases

Financial Lease

Transfers rights/risks (like a loan).

Recognize:

• Asset (at present value)
• Liability (obligation to pay)
• Interest expense + Depreciation

Operating Lease

Pure rental.

Recognize only expense in Profit & Loss (P&L).

6. Financial Assets

Types of Financial Assets:

• Shares
• Loans/credits
• Bonds
• Derivatives

Short-Term (Fair Value Through P&L)

For resale: gains/losses recognized in Profit & Loss (P&L).

Purchase costs are treated as an expense.

Long-Term (Fair Value Through Equity)

Held for income: valuation recognized in Equity.

Gains/losses are NOT recognized in P&L unless the asset is sold.

Accounting Principles and Annual Accounts

1. What is Accounting?

A system to reflect a company’s economic-financial situation.

Used by:

• Managers
• Investors
• Banks
• Government, etc.

2. Annual Accounts (Financial Statements)

Must include:

• Balance Sheet
• Profit & Loss (P&L) Account
• Statement of Changes in Equity
• Cash Flow Statement
• Notes (Memoria)

3. Profit & Loss vs. Balance Sheet

Profit & Loss (P&L) Account: Income – Expenses = Net Profit

Balance Sheet: Assets = Equity + Liabilities

4. The Accounting Cycle

1. Record event (Journal Entry)
2. Post to Ledger
3. Close year (Adjustments)
4. Prepare:
   • Profit & Loss (P&L)
   • Balance Sheet
   • Annual Accounts

Example: Journal Entry Rule

Every journal entry must balance:

Total Debit = Total Credit

5. Key Accounting Principles