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Spain Corporate - Income determination

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The general rule for determining income for CIT purposes is that accounting rules must be followed unless tax law establishes otherwise. In order to maintain this consistency, CIT/PE NRIT returns include pages in which the company’s accounting/commercial balance sheet and profit and loss account figures must be entered.

In Spain, the tax authorities are authorised to modify accounting results exclusively for the purpose of determining tax results if they observe that a company’s accounting results have not been calculated in accordance with Spanish Generally Accepted Accounting Principles (GAAP).

Inventory valuation

Inventory is valued at acquisition price or production cost under the average and first in first out (FIFO) valuation methods (the replacement and base stock valuation methods may only be used in exceptional cases). Again, since there are no specific tax rules for determining taxable income, accounting rules are also applicable for calculating valuation and obsolescence provisions for inventory.

Capital gains and losses

Capital gains are taxable in the tax year in which they arise. They are treated as normal income and taxed at the standard CIT rate of 25%.

For operations where payment is deferred or paid in instalments, the income is obtained proportionally as the corresponding payments are made, unless the taxpayer opts to be taxed in accordance with the accrual criteria.

As a general rule (there are certain exceptions), capital gains arising on the transfer of companies resident in Spain in which at least a 5% interest (or an interest with an acquisition value of over EUR 20 million) has been held for at least one year are exempt from tax. The period during which the interest is held by another group company is also taken into account for this rule.

Capital losses arising from the transfer of shares will only be tax deductible if they relate to shareholdings of less than 5% (with a cost of less than EUR 20 million) and, in the case of holdings in the capital or equity of non-resident entities, the investee entity has been subject to and is not exempt from a foreign tax identical or analogous in nature to CIT at a nominal rate of, at least, 10% or is resident in a country with which Spain has concluded a double tax treaty (DTT), and it contains an exchange of information clause.

Negative income generated in the event of the extinguishment of the investee entity will, in any event, qualify for deduction for tax purposes unless such extinguishment results from a restructuring operation.

In such cases, the negative income will be reduced by the amount of the dividends received in the ten years prior to the date of extinguishment, unless such dividends have reduced the acquisition value, and provided that they qualified for the application of an exemption or deduction regime for the elimination of double taxation for the same amount.

Tax losses generated on transfers of assets to another company in the same corporate group are not tax deductible when the transfer takes place. Their tax deductibility is deferred to the moment when the assets are written off the acquirer's balance sheet transferred out of the group or when the transferor or acquirer cease to form part of the group. In the case of depreciable/amortisable assets, however, the undeducted amount should be included in line with its depreciation/amortisation by the acquirer.

Dividend income

Dividends received from companies resident in Spain in which at least a 5% interest has been held for at least one year, including ownership by other group companies, (or with an acquisition value of over EUR 20 million) are exempt from tax. Dividends received from companies resident in Spain in which an interest of less than 5% is held (and with an acquisition value of less than EUR 20 million) are taxable in their entirety for the recipient.

Special rules apply to, amongst others, the following:

  • Dividends received from companies that obtain dividends or capital gains generated from transfers of interests in other companies, provided that such dividends and capital gains exceed 70% of the company's gross income.
  • Capital gains arising from transfers of interests in companies that receive dividends or capital gains generated from transfers of interests when such dividends and capital gains exceed 70% of the company's gross income.

Please see Foreign income below for a description of the taxation of dividends received from foreign companies.

Stock dividends

CIT is not levied on bonus shares (i.e. shares partially or totally given to shareholders in a capital increase charged against distributable reserves), although they must be taken into account when calculating the average cost of shares held for the levying of tax when the shares are sold.

Interest income

Interest income is treated as normal income and taxed at the standard CIT rate of 25%.

Royalty income

Royalty income is included in the taxable base jointly with the other kinds of income.

However, a 60% reduction may be applied on the net income obtained from licensing certain intangible assets if certain requirements are met (the effective tax on this net income would generally be 10%).

Effective as of 1 July 2016, the rules to calculate the patent box tax incentive have been modified to bring this tax incentive in line with the EU and OECD Agreement. With this reform, income generated from assigning the use of certain intangible assets may be eligible for a reduction in the taxable base of the percentage resulting from multiplying by 60% a coefficient that may not be greater than one (i.e. the maximum reduction will be 60%).

Other significant items

The following items, amongst others, are excluded or deferred from taxable income:

  • Distributed dividends corresponding to profits obtained by companies in tax periods in which the flow-through tax regime (internal and international) has been applied.
  • Assets written up in accordance with revaluation laws and tax-protected restructuring transactions involving accounting capital gains.

Foreign income

Tax relief on foreign income

Resident companies are taxed on their worldwide income. For foreign-source income, total or partial tax relief in the form of tax credits or exemptions is given if tax is levied on the income in both Spain and the foreign country where the income has been generated.

This tax relief may be available for the following:

  • Economic double taxation, which is when the same income is taxed in the hands of two different taxpayers. For example, another government taxes a foreign company on the income earned in that country and a Spanish resident shareholder is taxed on the dividends that it receives from the foreign company or the capital gains from transfers of its shares.
  • Juridical double taxation, which is when the same income is taxed in two countries in the hands of the same taxpayer. For example, the income is taxed (via a WHT) in the country where the income is generated and again in the other country where the recipient is resident.

The main characteristics of double tax relief are discussed below.

Dividends or profit-sharing income received by a Spanish company from a foreign company are tax exempt, subject to compliance with the following requirements:

  • The Spanish company has at least a 5% interest in the foreign company (or an interest with an acquisition value over EUR 20 million) that has been held for at least one year. This one-year holding period is deemed to be complied with if it is completed after the dividend is distributed. The period in which the interest is held by another group company is also taken into consideration for this rule.
  • The investee has been taxed by a tax that is identical or similar to Spanish CIT at, at least, a 10% nominal tax rate in the tax year in which the distributed profits were obtained. This requirement is complied with when the investee is resident in a country with which Spain has signed a tax treaty containing an exchange-of-information provision.
  • The tax exemption would not apply with respect to the amount of dividends or profit sharing whose distribution generates a tax deductible expense in the paying entity.

Capital gains arising from the sale of shares in foreign companies also qualify for a tax exemption if the requirements stated above are complied with during the holding period.

Both the dividends and capital gains exemptions are not applicable when the investee company is resident in a tax haven, unless it is an EU member state and the company can prove that it has been incorporated and operates for valid business reasons and that it carries on business activities.

Tax exemption is limited in certain cases.

Special rules apply to, amongst others, the following:

  • Dividends received from companies that obtain dividends or capital gains generated from transfers of interests in other companies, provided that such dividends and capital gains exceed 70% of the company's gross income.
  • Capital gains arising from transfers of interests in companies that receive dividends or capital gains generated from transfers of interests when such dividends and capital gains exceed 70% of the company's gross income.

As an alternative to this 'tax exemption' regime and applicable to dividend distributions only, a tax credit based on imputation is established. This tax credit allows the crediting of the foreign tax paid abroad on the income from which the dividends are paid and the foreign WHT paid on the profit distribution, up to the limit of the tax that would have been paid on the gross amount in Spain. The only requirement for the application of this 'tax imputation' regime is that the Spanish company has at least a 5% interest in the foreign company during the 12 months prior to the date on which the dividend is due and payable. This one-year holding period is deemed to be complied with if it is completed after the dividend is distributed. The tax credit can be carried forward for an unlimited number of years.

Spanish legislation provides for CIT relief on 'juridical' double taxation by applying the 'tax imputation' regime. Under this regime, gross foreign income (including foreign WHT paid) is included for Spanish tax calculation purposes, and a tax credit for the foreign WHT paid is applicable up to the amount of the CIT that the company would have paid if such gross income had been obtained in Spain. The part of the tax paid abroad with respect to which the taxpayer is not entitled to this tax credit may be considered tax deductible, provided that it corresponds to the foreign company's business activities carried out abroad. The tax credit can be carried forward for an unlimited number of years.

Under Spanish tax treaties and implemented EU tax directives, several methods have been established to avoid double taxation. The main one is the traditional deduction of a tax credit from tax effectively paid. However, some treaties establish a tax exemption or the exclusive right to tax. Also, a tax-sparing clause is included in some treaties, which allows for the deduction of not only the tax actually paid but a higher amount of tax.


Last Reviewed - 21 December 2017

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