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Automatic and standardised exchange of tax information agreements

The US Foreign Account Tax Compliance Act (FATCA) was enacted in 2010 to detect and prevent offshore tax evasion. Although, due to its name, it may seem that FATCA is for financial institutions, many global companies outside the financial services industry may be affected by FATCA if companies of their worldwide network fall under the purview of FATCA or have operational areas that make or receive payments subject to FATCA.

Multinational companies that are withholding agents are already required to report, withhold on payments, and record payees, but FATCA requires that changes be made to these activities. FATCA has established that multinational businesses should assess company payees differently, engage in withholding on certain gross proceeds transactions (a change from historic processes), and report other information to the US Internal Revenue Service (IRS).

The withholding provisions of FATCA came into effect on 1 July 2014. Compliance with FATCA may require changes to existing systems and processes across business units and regions, the renewal of policies and day-to-day practices, as well as other new tasks, such as registering with the IRS.

Spain and the United States have signed an intergovernmental agreement (IGA) aimed at improving compliance of international tax laws and enforcing FATCA. Under this agreement, published in the Spanish Official State Gazette on 1 July 2014, financial institutions in Spain and the United States are required to provide their tax authorities with information on taxpayers from the other signatory country. This information will then be automatically exchanged between those tax authorities through a standardised procedure.

Special tax regime applicable in the Basque Country

The three provinces that make up the region of the Basque Country (Álava, Guipúzcoa, and Vizcaya) have an 'economic agreement' with Spain's central government (laid down in and regulated by Law 12 of 23 May 2002) in accordance with which these provinces are entitled to establish their own tax regimes.

There are certain provisions in Law 12 of 23 May 2002 regarding CIT that make this region of Spain more attractive for companies, and three CIT Acts have come into effect for each of the three provinces for tax periods beginning on or after 1 January 2014.

General tax rate

The general tax rate is 28%.

Lower tax rates and other tax benefits

Small companies

A reduced rate of 24% is levied on small companies. A small company is considered to be a company that meets the following requirements in the year prior to the application of the special tax regime:

  • It carries on a business activity.
  • Its net turnover or assets is under EUR 10 million.
  • Its average number of staff is under 50.
  • An interest of 25% or more in the company is not held, directly or indirectly, by a company that does not meet the above requirements.

Other benefits are as follows:

  • Free depreciation for new tangible fixed assets (except buildings).
  • General bad debt provision of up to 1% of credit sales and services.

Micro companies

A reduced rate of 24% is levied on micro companies. A micro company is considered to be a company that meets the following requirements in the year prior to the application of the special tax regime:

  • It carries on a business activity.
  • Its net turnover or assets is under EUR 2 million.
  • Its average number of staff is under 10.
  • An interest of 25% or more in the company is not held, directly or indirectly, by a company that does not meet the above requirements.

Other benefits are as follows:

  • General bad debt provision of up to 1% of receivables.
  • Total depreciation/amortisation charges of up to 25% of net tax value or free depreciation for new tangible fixed assets (except buildings).
  • General tax relief of 20% of prior positive taxable income given as a 'tax compensation' for the difficulties faced by companies of this size.

Holding companies

For holding companies, including, amongst others, real estate companies, the tax rates are as follows:

Taxable income (EUR) Tax rate (%)
0.00 to 2,500.00 20
2,500.01 to 10,000.00 21
10,000.01 to 15,000.00 22
15,000.01 to 30,000.00 23
30,000.01 and over 25

The requirements to be taxed under these rates are as follows:

  • The company's shareholders representing at least 75% of its capital are persons, holding companies, or other companies associated with such persons or companies. This requirement should be met throughout the tax period.
  • For at least 90 days of the tax period, over half of the company's assets are made up of securities or are not used to carry on business activities. Leased real estate is not considered to be used to carry on a business activity when the company does not have at least five employees on average in a year who work exclusively for the company on a full-time basis.
  • Companies where at least 80% of their income is generated from assignments of use of real estate that is not considered to be a real estate leasing business activity (see previous paragraph) or is generated from transfers of own capital to third parties or from provisions of services to associated parties and that do not have sufficient personal and material resources may also be taxed under this tax regime.

This tax regime establishes the following rules, which are applicable to these types of companies:

  • All expenses, excluding those stated below, cannot be considered tax deductible.
  • An amount equal to 20% of gross income generated from leases of housing and their financial expenses may be considered tax deductible.
  • An amount equal to 30% of gross income generated from leases of other real estate and their financial expenses may be considered tax deductible.
  • Net income for each leased property cannot be negative.

Tax-loss carryforwards

Tax losses may be carried forward for the following 15 years. Tax-loss carryforwards pending offset in the first tax period beginning as of 1 January 2014 may be carried forward for the following 15 years as of such tax period.

Tax deductibility of amortisation of goodwill and intangible assets

According to a recent amendment of the Audit Law, intangible assets should be considered to have a definite useful life.

Amortisation recorded for intangible assets is considered tax deductible over the assets’ useful lives. However, if the useful life cannot be determined, amortisation would be tax deductible up to a maximum annual limit of 10% if the following requirements are met:

  • The assets have been acquired for consideration.
  • The acquiring and transferring companies are not associated companies.

Furthermore, due to the above-mentioned amendment of the Audit Law, goodwill is amortisable assuming a useful life of ten years. However, this accounting amortisation would not be tax deductible, and the corresponding book-to-tax adjustment should be made.

From a tax perspective, goodwill amortisation is tax deductible up to a maximum annual limit of 12.5% if the following requirements are met:

  • The goodwill has been acquired for consideration.
  • The acquiring and transferring companies are not associated companies.

It is not required to recognise an unavailable reserve for this purpose.

However, if an impairment loss is recognised or if the goodwill is transferred, the tax amortisation should be reversed.

Financial goodwill

Financial goodwill is tax deductible up to a maximum annual limit of 12.5% when at least a 5% interest is acquired in a company and the shares are not quoted on a stock exchange or at least a 3% interest if the shares are quoted on a stock exchange.

If the company from which the shares have been acquired has an interest in another company, the equity, assets, and rights recorded in the group's consolidated annual accounts must be taken into consideration when calculating the financial goodwill. The part of the financial goodwill for income obtained by previous owners that have availed of a double tax exemption for income obtained from transfers of shares will not be tax deductible. Amounts deducted for this concept will increase taxable income if there are impairment losses (see Impairment losses below).

The requirements for the shares are as follows:

  • A 5% interest (or 3% in the case of quoted companies) should be held for one year.
  • The subsidiary should be subject to and not exempt from CIT or a similar tax.
  • At least 85% of the subsidiary's income should be generated from business activities.

If the shares are not acquired on a stock market, the company that acquires the shares must not be in any of the situations provided for in Article 42 of the Spanish Commercial Code in relation to the transferring company.

Depreciation/amortisation periods

Depreciation/amortisation periods for assets are shorter than those established by state CIT law.

Reinvestment of extraordinary income

Income obtained from the sale of tangible fixed assets or intangible assets can be deducted from taxable income if the following requirements are met:

  • The amount obtained from the sale is reinvested in similar types of assets or in the acquisition of shares that comply with certain requirements within a four-year period (as of one year prior to the sale up to three years after the sale).
  • The asset in which the reinvestment is made is held for five years (three in the case of movable assets) or, if less, the asset's useful life.

Income generated from intellectual or industrial property

From 1 July 2016, companies may deduct 70% of income (revenue less amortisation and expenses) obtained from transfers of intellectual or industrial property rights from taxable income upon complying with certain requirements only if the company has created the intellectual or industrial property itself.

If the intellectual or industrial property has been partially acquired or developed by related companies, this 70% reduction can only be applied if the ratio of expenses incurred with related parties does not exceed 30% of the expenses incurred in the development carried out by third parties or by the company on its own. However, if this ratio exceeds 30%, the reduction will be reduced proportionally.

The following features regarding this reduction have also been introduced:

  • The income to be reduced will be determined as the difference between the revenues obtained and the amortisation and expenses directly related to the intellectual or industrial property that is transferred.
  • This reduction is no longer applicable to the income obtained as a consequence of the transfer of trademarks.
  • Certain limitations are applicable if a company applies this reduction and obtains negative income in previous or future years.
  • A transitional regime is envisaged for the transfers of intellectual or industrial property rights carried out before 1 July 2016. This transitional regime is applicable until 30 June 2021 and its application is optional.

In addition, in Bizkaia and Alava, companies may reduce taxable income by 5% of the acquisition price or production cost of intellectual or industry property assets used to carry on their own business activities if they fully own such assets. This reduction cannot exceed 0.5% of income obtained from the business activity in which these assets are used.

The additional reduction envisaged in the last paragraph is not applicable in Gipuzkoa.

Limit for tax relief for financial expenses (thin capitalisation rules)

A general thin capitalisation tax system is established to restrict the tax deductibility of financial expenses, which establishes a 3:1 debt-to-equity ratio for tax purposes.

This limit applies to borrowings with any associated companies, whether they are resident in Spain, the European Union, or any other countries. The limit does not apply when a company's net borrowing with associated companies does not exceed EUR 10 million at any time during the tax period.

Companies may ask the tax authorities to propose a different ratio that they can apply.

Limit for tax relief for expenses incurred for representation, gifts, and certain transportation

Expenses incurred for representation, gifts, and certain transportation are tax deductible, with certain limits.

In addition to these limits, the allocation rule is maintained for 50% of vehicles used for both business activities and private purposes. In addition, for passenger and other similar cars, the maximum amount of what is understood to be a reasonable acquisition price (EUR 25,000) is maintained, and only expenses for vehicles that do not exceed this acquisition price will be tax deductible.

Impairment losses

Losses for impairment of shares in companies are tax deductible in accordance with the following regulations:

  • If an interest of less than 5% is held in unquoted companies or, otherwise, in quoted companies that are group companies, jointly-controlled companies, or associates, then the difference between shareholder's equity at the beginning and the end of the year in proportion to the interest held is tax deductible, taking into account any capital contributions or reimbursements made.
  • If an interest of 5% or more is held in unquoted companies or 3% in quoted companies, then the difference between the acquisition price and shareholder's equity is deductible in proportion to the interest held, adjusted for tacit capital gains at the valuation date.

Shareholder's equity shall be the shareholder's equity recorded in the consolidated annual accounts (see Financial goodwill above).

Elimination of double taxation for dividends and income obtained from transfers of shares in resident and non-resident companies in Spain (exemption mechanism)

Dividends or shares in profits

To apply the tax exemption for interests in companies resident in Spain, the following requirements established for interests in non-resident companies should be met:

  • A 5% interest (or 3% in the case of quoted companies) should be held for one year.
  • The subsidiary should be subject to and not exempt from CIT or a similar tax.
  • At least 85% of the subsidiary's income should be generated from business activities.

Notwithstanding, for dividends generated from resident subsidiaries that do not comply with these requirements, 50% of the amount of the dividends may be deducted from taxable income. This rule therefore applies to:

  • Interests below 5% (or 3% in the case of quoted companies) in companies resident in Spain.
  • Interests in companies resident in Spain that do not comply with the requirement that 85% of their income is generated from business activities.

For companies taxed at a tax rate lower than 10%, except for residents in a country that has an international DTT, the tax exemption for double taxation does not apply.

Income obtained from transfers of shares

Capital gains obtained from disposals of interests in resident and non-resident companies are not included in taxable income. The requirements to be met to not include them are the same as the requirements for the application of dividend exemption, which should be met for all financial years when the interest is held, except for the requirement regarding the percentage of the interest (5%, or 3% in the case of quoted companies), which should be met on the day when the transfer is made.

If any of the requirements are not met, the part of the income corresponding to a net increase of undistributed profits will not be included in taxable income in proportion to the profits generated in financial years when the requirements are met, and the part that does not correspond to such net increase will be presumed to be generated linearly during the time when the interest is held. In the case of resident subsidiaries that do not comply with the requirements of being subject to CIT or a similar tax and of carrying on business activities, an amount equal to the net increase of undistributed profits that may be allocated to the interest in the subsidiary generated during the time when the interest is held (excluding the part that would not have been included in taxable income with the offsetting of tax-loss carryforwards) will not be included in taxable income (up to the limit of calculated income).

Participating loans to carry out new business activities or projects

Income generated from variable interest on participating loans is not included in taxable income if it is related to the borrower's profits. The exemption does not apply to remuneration generated from fixed interest.

The following requirements should be met in this case:

  • The lender should have a 25% direct or indirect interest in the borrower (15% for quoted subsidiaries, and this participation should be held for one year).
  • The loan should be used to finance new business activities or projects.
  • The exempt income not included in taxable income should be used to grant new participating loans, with the same requirements, or be set aside to the special reserve to foster business capitalisation or the special reserve to boost entrepreneurship and production activities (see below).
  • The variable interest may not exceed the following limits:
    • 20% of profits (before interest on the participating loan) of the borrower for the percentage of the lender's interest.
    • 1.5 times the late payment interest on the average balance of the loan during the tax period.

The withholdings made on interest not included in taxable income are not deductible (general 19% tax rate).

Measures to foster companies' capitalisation

Some measures were introduced to improve the tax treatment of structures based on an increase in shareholder's equity and a reduction of the need to resort to borrowing. These measures are:

Reserve to foster business capitalisation

Companies may reduce their taxable income by an amount equal to 10% of the amount by which shareholder's equity is increased for tax purposes compared to the shareholder's equity of the previous year, and this amount should be set aside to a non-distributable reserve for at least five years. During this five-year period, the company's shareholder's equity should remain the same or be increased unless it is decreased due to accounting losses.

The application of this deduction may not give rise to a negative taxable income or an increase in negative taxable income although amounts not deducted due to insufficient taxable income may be deducted in the following tax periods.

Special reserve for levelling-off of profits

Companies may reduce taxable income by the amount of accounting results set aside to the special reserve for 'levelling-off of profits' up to a maximum amount of 10% of the part of these results that may be freely distributed under company law and up to the limit of 15% of taxable income for the financial year. In addition, the balance of the special reserve may not exceed 20% of shareholder's equity for tax purposes at all times.

This reserve will be allocated to offset tax-loss carryforwards, in which case such tax-loss carryforwards cannot be offset in future years. Consequently, this is a way to offset tax-loss carryforwards earlier. If, within a period of five years, the company does not generate tax-loss carryforwards, the reserve will be treated as taxable income. In this case, the effect will be a temporary deferral of tax.

Special reserve to boost entrepreneurship and production activities

Companies may reduce taxable income by 60% of the accounting profit of the year, which should be set aside to the special reserve to boost entrepreneurship and production activities, up to a maximum amount of 45% of their taxable income. In addition, the balance of this reserve may not exceed 50% of shareholder's equity for tax purposes at all times.

This reserve is not freely distributable and should be used within a period of three years for, amongst others, new non-current assets, assets that give rise to a tax credit for environmental investments, or for investments in companies under development.

Investments in new tangible fixed assets

A 10% tax credit can be applied for investments in new tangible fixed assets upon complying with certain requirements. The minimum depreciation period for the assets, excluding computer equipment, is five years. The tax credit is 5% for investments in non-current assets that are considered to be improvements or investments in leased assets carried out by lessees.

The investment should exceed 10% of the carrying amount (less depreciation/amortisation) of the company's tangible fixed assets, buildings, and software recorded for the previous year.

Research and development (R&D)

A 30% tax credit can be availed of for expenses incurred from R&D activities. If the expenses are higher than the average expenses incurred by the company during the previous two years, the tax credit is 50% on the excess amount.

An additional tax credit of 20% can be availed of for the following expenses:

  • Staff expenses incurred for staff exclusively carrying out and qualified to carry out R&D activities.
  • Expenses incurred for projects contracted from certain universities and public organisations.

A 10% tax credit can be availed of for investments made in tangible fixed assets (excluding buildings) and intangible assets that are exclusively assigned to R&D activities.

Technological innovation

A 20% or 15% tax credit can be availed of for certain expenses incurred for technological innovation.

Expenses incurred for environmental conservation and improvement and for conservation of energy

Companies are eligible for a 30% tax credit for investments made in the equipment listed in the Basque List of Environmental Technologies upon complying with certain requirements.

Companies may also qualify for a 15% tax credit for investments made and expenses incurred in respect of tangible fixed assets upon complying with certain requirements.

Job creation

The following tax credits can be availed of for job creation upon complying with the requirements stated:

  • EUR 4,900 for each job created, provided that a permanent employment contract is signed with the employee.
  • EUR 9,800 for each job created, provided that a permanent employment contract is signed with the employee and a person who has special difficulties in finding employment is contracted.

The company’s average number of staff with permanent employment contracts must be increased by at least the same number of contracts that generated the tax credit, and this increase must be maintained by the company for two years.

Time limits for the application of tax credits

Tax credits can be carried forward for a period of 15 years as of the date on which the company qualifies for them. For tax credits generated before 1 January 2014, the 15-year period starts as of this date.

Limits on the amount of tax credit applied

For a tax year, the combined sum of all investment tax credits, excluding tax credits for R&D and technological innovation, may not exceed 45% of a company’s CIT liability.

Effective tax rate and minimum tax

The CIT reform establishes a minimum tax to determine a company's effective CIT liability. Tax credits applied in the tax period cannot reduce effective CIT liability below this minimum although this limit does not apply for R&D and technological innovation tax credits.

The application of tax credits to determine the effective tax liability of a company that obtains positive taxable income (except for R&D and technological innovation tax credits) cannot give rise to an effective CIT liability that is lower than the following rates:

  General tax rate (%) Minimum tax rate (%) Minimum reduced tax rate (%)
General companies 28 13 11
Small and micro companies 24 11 9

The minimum reduced tax rate applies to companies that maintain or increase their average number of staff of the previous year indefinitely.

Advance CIT payments

There is no obligation to make advance CIT payments.

Tax groups

The economic agreement establishes that the same rules should apply to the Common Territory and Basque companies regarding the composition of tax groups, the definition of controlling and subsidiaries, and the tax treatment of internal operations carried out in tax groups.

Therefore, the recent tax reform for the Spanish Common Territory would apply to Basque tax groups. On this matter:

  • A non-resident company or company resident in the Spanish Common Territory may be the controlling company of a Basque tax group (horizontal consolidation).
  • The incorporation in a Basque tax group of companies indirectly owned by companies that do not form part of the group (non-resident or resident in the Spanish Common Territory) is permitted.

As established in the Spanish Common Territory regulations, when the controlling company is a non-resident company, one of the companies that makes up the group is appointed as their representative and is responsible for complying with the group's statutory requirements and formalities. Under Basque regulations, the representative company of a Basque tax group should be:

  • The controlling company if this company is resident in the Spanish territory, or
  • The Basque company of the tax group with the highest turnover in the previous tax year (if no other company resident in the Spanish territory complies with the requirements established in the tax regulations to be considered the controlling company).

However, the non-resident controlling company may appoint any other company of the Basque tax group of companies as the group’s representative as long as the appointed company is subject to the tax regulations applicable to the company of the tax group with the highest turnover in the previous tax year.

Obligation to disclose assets located overseas

The obligation to disclose assets located overseas, such as accounts, shares, real estate, or vehicles, is also established in the three Basque territories. Taxpayers in these territories should file a tax return (Form 720) annually between 1 January and 31 March to disclose these assets. Severe fines are imposed (a minimum of EUR 10,000) if CIT payers fail to comply with this obligation.

In addition, assets regarding which the information disclosure obligation is not complied with by the established time limit will be treated as unreported income for CIT payers and allocated to the earliest tax period of those that are not statute barred. Failure to comply with the obligation to declare this income is a very serious infringement and fines of 150% of the gross tax liability are imposed.


Last Reviewed - 21 December 2017

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