Corporate Income Tax in Spain: A Comprehensive Guide

Posted on Oct 30, 2024 in Law & Jurisprudence

Corporate Income Tax (IS) in Spain

Nature

Corporate Income Tax (IS) in Spain is a tax on the capacity to generate income. It’s the second-highest-grossing tax after income tax.

It has a personal nature (applied to legal persons) and is a proportional tax (usually a fixed rate of 30%).

Currently, the IS rate varies depending on the company’s size and turnover. For example, if a company’s turnover is less than 5,000,000€, the IS rate is between 20% and 25%.

All income is subject to taxation, regardless of its source.

Scope

The IS applies throughout Spain. However, the Basque Country and Navarra have their own IS laws. The rest of Spain shares a common IS law.

Taxable Income (HI)

In the IS, the taxable income (HI) is the source of income, regardless of its origin. The existence of HI leads to tax liability. If there is no HI, there is no tax liability. The law defines specific cases of non-liability and exemptions.

Estimated Income

The law establishes a presumption of payment for goods transferred between two companies. Article 5 presumes that the good is paid for at its market value. However, it allows for evidence to the contrary, such as if the cost of the transfer is zero (free transfer). Any evidence admitted in law can be used to demonstrate this (e.g., accounting books).

Allocation of Revenue

This refers to civil societies, community property, and inheritances. These entities are not taxed under the IS. Instead, the income obtained is allocated to their members or participants (who are taxed under income tax). These entities are not legal persons. Since 2007, professional civil societies have gained legal personality as they must be registered with a notary and the commercial register.

Taxable Subjects

In the IS, the taxpayers are legal persons other than civil societies within Spanish territory. They are taxed on their worldwide income, including income derived from other countries. Mechanisms exist to avoid double taxation on income earned and taxed abroad (tax exemptions and deductions). Societies are considered entities.

Taxable Base (BI)

The taxable base (BI) in the IS is the amount of income in the tax period minus any previous negative BI. A negative BI represents accumulated tax losses from prior years, which can be offset for up to 15 years according to Article 25. The IS uses an objective estimation method for hydrocarbons. When direct estimation is impossible (e.g., due to data loss from fire or theft), the indirect method is used.

General Rules of Depreciation

Depreciation is the purchase price or production cost, excluding the residual value. For buildings, the purchase price is not depreciable, excluding restoration costs.

The following can be depreciated freely:

  • Tangible and intangible elements of SAL and SLL (owned companies) during the first 5 years from their qualification as such.
  • Mining assets, tangible and intangible fixed assets (excluding buildings) assigned to R&D.

Buildings can be depreciated in parts over 10 years. R&D costs capitalized as intangible assets can also be depreciated.

(Law 4/2008, Additional Provision 11th) Investments in new tangible assets and property investments affecting economic activities can be freely amortized as long as the average total workforce remains at the average of the previous 12 months.

Tax-Deductible Impairment Losses

Impairment losses are tax-deductible when:

  • 6 months have elapsed since the expiry of the operation.
  • The debtor is declared bankrupt.
  • The debtor is prosecuted for the crime of concealment of assets.
  • The obligations have been claimed by court order or are subject to litigation or arbitration.

Non-Tax-Deductible Impairment Losses

Impairment losses are not tax-deductible (except when subject to arbitration or legal proceedings) when:

  • They are due to or secured by public entities (e.g., municipalities).
  • They are secured by credit institutions or mutual guarantee societies.
  • They are secured by real covenants of retention of title and liens, except in cases of loss or degradation of the warranty.
  • They are secured by credit insurance or guarantees.
  • They have been subject to renewal or express extension.

Insolvency losses derived from individuals or entities are not deductible, except in cases of prior linked insolvency. Losses based on global estimates are also not deductible.

Non-Deductible Expenses

The following expenses are not deductible:

  • Equity compensation (dividends).
  • Expenses derived from the accounting IS.
  • Fines and criminal penalties, administrative surcharges, and late payment surcharges for claims, settlements, and self-assessments (sanctions from commercial agreements are deductible).
  • Gambling losses.
  • Gifts and donations (donations are considered donations, and expenses for public relations with customers and suppliers and those for the company’s customs staff are not considered donations).
  • Expenses incurred to provide the sale of goods and services or those correlated with income.
  • Provisions.
  • Expenses incurred with persons or entities resident in tax havens (deductible when it can be proven that operations were effectively carried out).

Rules of Assessment

General rule: Assets are valued according to the criteria of the Commercial Code: acquisition cost or production cost.

The new general accounting plan introduced Fair Value. Certain operations must be assessed at market value because there is no cash consideration:

  • Contributions in kind: The fair value, which matches the market value, is used to account for the good, so no adjustment is needed (with the old PGC, the book value had to be used, requiring adjustments).
  • Transfer of real estate: Negative adjustments are made by subtracting the inflation amount since January 1, 1983.

Restatement: (Updated Net Value – Net Book Value) x Coefficient. Updated Net Value: The purchase price and depreciation are multiplied by a coefficient. The purchase price is multiplied by the coefficient of the year of purchase, and each repayment is multiplied by the coefficient for the year of redemption. External Financing Ratio (equity/liabilities – Funds (cash + credit)) does not apply if the value is 0.4.

Transactions

Transactions between related persons or entities are measured at their fair market value, meaning the market value that would have been agreed upon by independent persons or entities under free competition. The tax authorities can verify the declared value and correct the IS if it’s not the market value. Companies are required to keep certain documents related to these transactions and are penalized if they don’t.

The following are considered related persons or entities:

  • A company and its partners, members of its board of directors, partners or directors of other companies in the same group, as well as transactions with spouses and relatives up to the 3rd degree of partners and advisors.
  • For a transaction to be considered related, the partner’s participation must be at least 5% of the capital (1% for publicly traded companies).
  • Operations carried out by entities belonging to the same group.
  • Operations between a partnership and another entity in which the first indirectly holds at least 25% of the capital.
  • Operations between two companies in which some partners or close relatives hold at least 25% of the capital.
  • Operations between a non-resident company in Spain and its permanent establishment in Spain, and a resident entity in Spain and its permanent establishments abroad.
  • Two entities belonging to a group of corporate partnerships.
  • Operations between two companies when one holds power over the other (control).

Methods for Determining Market Value

  • Comparable uncontrolled price method: Compares the transaction with a similar operation between two independent entities with comparable characteristics.
  • Cost-plus method: Adds to the purchase price or production cost the common margin used by identical or similar independent persons or entities, or the margin of independent persons or entities in comparable circumstances, making necessary adjustments for equivalence and considering the operation’s peculiarities.
  • Resale price method: Subtracts from the selling price of a good or service the margin applied by the reseller in identical or similar transactions with independent persons or entities, or the margin applied by independent persons or entities in comparable operations.