Spain

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, 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.

Multilateral Competent Authority Agreements

Multilateral agreement on the automatic exchange of information on income received through digital platforms

The multilateral agreement between competent authorities on the automatic exchange of information on income received through digital platforms was published in the Official State Gazette on 19 September 2023.

Before this agreement, Law 13/2023, of 24 May 2023, amended the General Tax Law by including a new Additional Provision that aims to establish a new information reporting and due diligence obligation in relation to the informative declaration of subject platform operators with respect to mutual assistance.

This newly published agreement aims to allow the exchange of information between different administrations regarding income from the provision of accommodation, transportation, and other personal services. In addition, it allows the exchange of information on income obtained from the sale of goods and lease of means of transportation arranged through digital platforms.

Multilateral agreement on the automatic exchange of information on the mechanisms for circumventing the common reporting and information standard for opaque offshore structures

The multilateral agreement between competent authorities on the automatic exchange of information on the mechanisms for circumventing the common reporting and information standard for opaque offshore structures was published in the Official State Gazette on 18 September 2023.

The obligation to report information on cross-border tax planning mechanisms, which was already included in Law 13/2023, of 24 May 2023, entails an important change in international tax transparency and reinforces the capacity of the states to confront extraterritorial tax evasion.

In particular, the agreement tries to prevent situations where professional advisers and other intermediaries design, market, or assist in the implementation of offshore structures and arrangements that can be used by non-compliant taxpayers to circumvent the correct reporting of relevant information to the tax administration of their jurisdiction of residence, including under the Common Reporting Standards (CRS).

Base erosion and profit shifting (BEPS)

In July 2013, the OECD published a 15-point Action Plan to address BEPS by multinational companies. The Action Plan identifies actions needed to address BEPS, sets deadlines to implement these actions, and identifies resources and methodology needed to implement these actions.

Some jurisdictions and the European Union have already started implementing parts of the actions into national laws. Moreover, the European Union adopted two Anti-Tax Avoidance Directives (ATAD and ATAD 2) that include certain minimum standards to combat tax avoidance. Whilst the ATAD was to primarily be implemented into national laws by 31 December 2018, certain ATAD 2 proposals must be implemented into national laws by 31 December 2019.

Although Spanish legislation was already very similar to ATAD, some amendments to CIT were implemented by Law 11/2021 on the prevention and fight against tax fraud and transposing the ATAD as regards CFC and exit tax rules:

• The previously existing CFC regime was amended. In this regard, the imputation of income that occurs under this regime no longer affects only the income obtained by entities owned by the taxpayer but also the income obtained by their PEs abroad. Likewise, new types of income were introduced that must be subject to imputation under this regime, such as that deriving from dividends, financial leasing operations, or insurance, banking, and other financial activities.
• Exit tax guarantees that, when a taxpayer transfers one's assets or one's tax residence outside the tax jurisdiction of the state, that state taxes the capital gains generated in its territory, even if they have not been realised.

CIT Law established that when residence is changed to another member state of the European Union, that exit tax could be deferred, at the taxpayer’s request, until the date of transfer to third parties of the assets concerned.

In this regard, and in accordance with the ATAD, the regime was modified with effect from the tax periods starting on 1 January 2021, replacing this deferral with the possibility of splitting payment of the exit tax over five years, when the change of residence is made to another member state or a third country that is a party to the European Economic Area Agreement, certain additional rules being established in the event that such a split is requested.

In parallel, when the transfer of assets has been subject to an exit tax in a member state of the European Union, the value determined by that member state will be accepted as a tax value in Spain, unless it does not reflect the market value.

On 9 March 2021, the Spanish government approved RDL 4/2021 amending the CIT Law and the NRIT Law as regards hybrid mismatches. The stated purpose of these amendments is to write into Spanish domestic law the anti-hybrid rules included in EU Directive 2016/1164, dated 12 July 2016 (ATAD), as amended by EU Directive 2017/952, dated 29 May 2017 (ATAD 2).

The RDL was published in the Spanish State Gazette on 10 March 2021 and entered into force the following day. The new rules effectively apply to the tax years not ended when the new rules entered into force (i.e. 11 March 2021).

While Spain already had some limited-scope anti-hybrid rules, the provisions now transposed into Spanish domestic legislation through RDL 4/2021 aim to cover the whole spectrum of hybrid mismatches arising between Spain and other jurisdictions. These rules will generally only come into play if the parties (located in different territories) to the arrangement are related, or when there is a structured arrangement (i.e. an arrangement involving a hybrid mismatch where the mismatch outcome is priced into the terms of the arrangement or an arrangement that has been designed to produce a hybrid mismatch outcome).

In particular, the new rules address the following situations:

• Mismatches deriving from the use of a hybrid instrument. The new rules disallow the deduction of the expense (‘primary rule’ in BEPS/ATAD parlance) if the payer is in Spain and the mismatch (which must be due to differences in the characterisation of the instrument or transaction) results in no income being recognised in the other jurisdiction or the income is exempt (a deduction without inclusion or ‘D/NI’ outcomes). Importantly, the deduction will also be disallowed if the income benefits from any tax rate reduction, or when the income qualifies for any tax relief or refund other than an ordinary tax credit.  However, a deduction will be allowed if the income is included in the taxable base of the payee in a tax year beginning within a 12 month-period following the end of the tax year when the expense accrued in Spain. The secondary rule (denial of the exemption when Spain is the payee) was already part of the participation exemption regime and is not modified.
• Hybrid entity payer rules. These are rules aimed at neutralising D/NI outcomes resulting from transactions with related parties where the hybrid outcome is a result of differences in the characterisation of the payer entity. When the hybrid entity is in Spain and the other jurisdiction does not recognise the income resulting from the transaction, the deductibility of such expense will be disallowed in Spain to the extent not offset by dual inclusion income (‘DII’). For these purposes, DII is defined as income subject to tax in both Spain and the other jurisdiction. Amounts non-deducted in the current tax year may be offset against DII generated during the following three years.
  
  Spain has implemented the secondary rule and will tax the income, to the extent not offset by DII in the payer’s jurisdiction, when the investor/payee is in Spain and the payer’s jurisdiction has considered the expense deductible. This taxation may be reversed if, during the following three years, the expense is offset in the payer’s jurisdiction against DII.
• Hybrid entity payee rule. A D/NI mismatch arises when, as a result of differences in the characterisation of the payee, an expense arising from a transaction with a related party is deductible in the hands of the payer without generating income in the hands of the payee. In order to address this mismatch, the deductibility of the expense is disallowed when the payer is in Spain. The same primary rule applies to expenses accrued from transactions with PEs and resulting in a deduction without inclusion outcome (either due to differences in the allocation of income between the PE and the head office and/or due to the PE being disregarded).
  
  Spain has made use of the option allowed by ATAD 2 and has not enacted the secondary rule provided for these situations.
• Deemed payments rule. A D/NI outcome can also result from internal dealings between a head office and one of its foreign PEs, or between two PEs (located in different jurisdictions) of the same head office, when one of the jurisdictions allows the deduction of an expense resulting from an internal dealing whilst the other jurisdiction does not recognise any income. When this is the case, Spain will disallow the deductibility of the expense, to the extent not offset by DII. Amounts non-deducted in the current tax year may be offset against DII generated during the following three years.
• Disregarded PEs. In order to avoid double non-inclusion situations, Spain will not apply the branch exemption to the extent that the foreign PE is disregarded in the jurisdiction where it is located.
• Double deduction mismatches. The new rules address double deduction situations arising when an expense accrued by a hybrid entity is regarded as deductible in both the payer’s (the hybrid entity) and the investor’s jurisdictions. Spain has enacted both the primary rule, by disallowing the deductibility of the expense in situations where the investor is in Spain, and the secondary rule, disallowing the deduction when the payer is in Spain. In both cases, the deduction is still allowed to the extent offset by DII and, as in the situations above, amounts non-deducted in the current tax year, may be offset against DII generated during the following three years. Equivalent rules apply to double deduction situations involving PEs.
• Imported mismatches. The imported mismatch rule is incorporated by disallowing the deductibility of expenses corresponding to cross-border transactions with related parties when the expense directly or indirectly funds deductible expenditure giving rise to a hybrid mismatch, except to the extent that the hybrid mismatch has been corrected in one of the other jurisdictions involved.
• Reverse hybrid: This rule seeks to treat a tax transparent Spanish entity as a taxpayer (opaque entity) where its members treat such entity as an opaque entity in order to avoid non-taxation outcomes.

RDL 4/2021 also adopts the ATAD 2 rules concerning dual resident entities and hybrid transfers. 

Finally, the enacted legislation clarifies that the anti-hybrid rules will not apply when the mismatch arises as a result of: 

• the payee being exempt from income tax
• the financial instrument concerned being subject to a special tax regime, or
• valuation differences. 

On 22 December 2021, the Instrument of ratification of the Multilateral Convention (MLI) to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS), made in Paris on 24 November 2016, was published in the Official State Gazette. Spain has formally made the relevant notifications with respect to 54 of its 88 tax treaties covered by the MLI. The measures resulting from the modifications introduced as a result of the MLI came into effect in Spain on 1 January 2023 in respect of 49 tax treaties covered by the MLI and will come into effect on 1 January 2024 in respect of 5 tax treaties. 

On 25 May 2023, Spain published Law 13/2023 in the Official State Gazette, which introduced new interest deduction limitation rules in line with the ATAD. Because Spain's current interest deduction limitation rules were considered equally effective as those in the ATAD, Spain was authorised to defer the transposition of the ATAD interest deduction limitation until 2024. The new rules, which apply from 1 January 2024, provide that the deduction of net interest expense is limited to 30% of EBITDA (operating profit) for the year, with the explicit exclusion of income, expenses, or rent that have not been included in the tax base. The main items impacted by this measure will be qualifying dividends from Spanish subsidiaries outside the tax group and from foreign subsidiaries, as well as net income obtained through PEs located outside Spain, that have so far been included in EBITDA for purposes of the interest deduction limitation and have benefitted from the 95% (or 100% in case of PEs) tax exemption provided in the Spanish participation exemption.

Reporting obligations for digital platforms operators (DAC 7)

New reporting obligations and due diligence requirements have been introduced for digital platform operators due to the transposition into Spanish Law of the European DAC 7 Directive. The Directive binds those platforms where sellers can sell products, provide services, rent immovable property, or rent any mode of transport.

Digital platform operators will have to collect, verify, and report to the tax authorities specific information with respect to reportable sellers offering goods or services on their platforms. The supporting records and documentation will need to be retained for ten years.

Any platform included in the scope of the Directive, including platforms from third countries, must register in one member state.

A severe penalties system is introduced for platform operators that do not comply with the reporting requirements.

In addition, there will be an automatic exchange of information between the tax authorities of EU member states.

Disclosure statements on virtual currencies

Taxpayers who operate with cryptocurrencies will be subject to certain information reporting obligations that will be applicable with respect to FY 2023 and following years. These obligations will affect:

• Persons and entities resident in Spain and PEs in Spain of foreign entities that provide services consisting of safeguarding private cryptographic keys on behalf of third parties to maintain, store, and transfer cryptocurrencies.
• Persons and entities resident in Spain and PEs in Spain of foreign entities that provide services for exchanging virtual currencies and fiat currencies or between different virtual currencies, mediate in any way in the performance of such operations, or provide services to safeguard private cryptographic keys on behalf of third parties, to maintain, store, and transfer virtual currencies, or make initial offerings of new virtual currencies.
• Persons and entities resident in Spain, the PEs in Spain of foreign entities of non-resident persons, or entities with respect to virtual currencies located abroad of which they are holders or of which they are an authorised beneficiary or over which they have power of disposal or of which they are the beneficial owner, custodied by persons or entities that provide services to safeguard private cryptographic keys on behalf of third parties, in order to maintain, store, and transfer virtual currencies.

Mandatory disclosure of cross-border arrangements that can potentially be considered as aggressive tax planning (DAC 6)

DAC 6 provides for mandatory disclosure to the tax authorities of cross-border arrangements among EU countries or between EU countries and countries outside the European Union that can potentially be considered aggressive tax planning.

Responsibility for compliance with reporting requirements first all of falls on the intermediary. However, if the transactions are carried out without an intermediary, if this intermediary is outside the European Union or if it is entitled to legal privilege, it may fall to the taxpayer to comply with the reporting requirements.

The characteristics or features of a reportable cross-border arrangement are listed in the EU DAC 6 Directive and referred to as ‘hallmarks’. Spanish legislation closely follows the Directive, but there are some divergences that need to be considered, such as the requirement to report, under hallmark C1, not only direct but also indirect transactions.

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.

Additionally, it is important to remark that the Provincial Regions of the Basque Country have recently made changes to the CIT regulations. The tax reform was approved in March 2018 for Álava and Vizcaya and in May 2018 for Guipúzcoa, although the modifications are effective for tax periods starting from 1 January 2018.

General tax rate

As of 1 January 2019, the general tax rate is 24%.

Lower tax rates and other tax benefits

Small companies

As of 1 January 2019, the general tax rate for small companies is 20%. 

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.
• Tax-loss carryforwards can be offset by up to the 70% of the positive tax base.
• No advanced CIT payment is required.

Micro companies

As of 1 January 2019, the general tax rate for micro companies is 20%.

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).
• Tax-loss carryforwards can be offset by up to 70% of the positive tax base.
• No advance CIT payment is required.
• As of 1 January 2019, the general tax relief is 10% of prior positive taxable income given as a 'tax compensation' for the difficulties faced by companies of this size (15% in Álava and Vizcaya in FY 2023 and Gipúzcoa in FY 2022).

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 related 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. As from January 2022, no employees are required in Álava and Guizpúzcoa if the tenant is a related party, and only one employee in the case of Vizcaya. 
• 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 related 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 for 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

The tax-loss carryforwards to be offset in each tax period cannot exceed 50% of the positive tax base (prior to offsetting). The limit is 70% for micro and small companies. 

Additionally, the time limit to offset the tax-loss carryforwards is 30 years.

Tax deductibility of amortisation of goodwill and intangible assets

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 is 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 related companies.

Furthermore, due to the above-mentioned amendment of the Audit Law, goodwill is amortisable over a useful life of ten years, although 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.

An unavailable reserve for this purpose does not have to be recognised 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 listed on a stock exchange or at least a 3% interest if the shares are listed 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 is not tax deductible. Amounts deducted for this concept 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 listed 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 Section 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 moveable assets) or, if less, the asset's useful life.

From FY 2018 onwards, the possibility of carrying out the reinvestment through the acquisition of interest in companies has been eliminated.

Income generated from intellectual or industrial property

From 1 July 2016, companies may deduct 70% of income (income 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 have also been introduced regarding this reduction:

• The income to be reduced will be determined as the difference between the income 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 from 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 was established for transfers of intellectual or industrial property rights carried out before 1 July 2016. This transitional regime was applicable until 30 June 2021 and its application is optional.

In addition, in Álava and Vizcaya, 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 activities in which these assets are used for.

This additional reduction is not applicable in Guipúzcoa.

The new tax regulations in force since 1 January 2018 have introduced some changes to the patent box regime. This incentive is limited to income generated from the transfer of the right to use or trading of patents, utility models, medications protection and plant protection products supplementary certificates, or advanced registered software obtained as a result of R&D projects. Therefore, the exclusion area of this regime is extended to, amongst others, the rights on information related to industrial, commercial, or scientific experiences (‘know-how’).

Limitation on the tax deductibility of financial expenses

The tax deductibility of financial expenses is limited to 30% of the operating profit of the tax period (in accordance with EU Directive 2016/1164), according to the following rules:

• Net financial expenses of the tax period are deductible, in any case, up to EUR 3 million.
• A carryforward method is implemented to deduct net financial expenses, which have not been deducted in the following tax period, jointly with the ones of the corresponding tax period, under the limit stated above. In addition, when net financial expenses of the tax period do not reach this limit, the difference between this limit and the net financial expenses of the tax period is added to the limit of the tax periods concluded in the immediately following five years, until that difference is deducted.

In addition, the application of the thin capitalisation rule to taxpayers that apply the interest-capping rule is not compatible. The thin capitalisation rule only applies if the limitation of tax deductibility of financial expenses stated above does not apply.

The general thin capitalisation tax regime is established (with a 3:1 debt-to-equity ratio) to restrict the tax deductibility of financial expenses.

This limit applies to borrowings with any related 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 related 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.

Finally, those expenses derived from transactions carried out with related parties (persons or entities) that, because of a different tax qualification at their level, do not generate an income or are exempt or subject to a nominal tax rate lower than 10% are not tax deductible.

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.

Specific limit on the deduction of financial expenses on the acquisition of interests in the capital or equity of any type of company

A specific limit is introduced for financial expenses generated from debts incurred to acquire interests in the capital or equity of any type of company. These expenses are deductible, subject to an additional limit of 30% of the acquirer's operating profits, excluding the operating profits of any company that may merge into the acquirer or that may join its tax group during the four years following the acquisition (besides this specific limit, the general limit on tax deductibility will also apply to these financial expenses).

This specific limit is not applicable when the debt associated with the acquisition of the interest reaches a maximum of 70% and is reduced, as of the time of the acquisition, by at least the proportional part corresponding to each of the following years until a level equal to 30% of the acquisition price is reached.

Charitable donations

As of 1 January 2019 onwards, donations are considered to be non-deductible expenses for CIT purposes in the Basque Territory of Vizcaya (in the case of Álava, as of 1 January 2022).

However, a tax credit may be available for donations to non-profit organisations that comply with certain requirements, and which will amount to 30% of the donation. On the other hand, for donations made to listed priority sponsorship activities, the tax credit will amount to 45% of the donation. The general time and quantitative limits for tax credits apply to 'charitable donation' tax credits.

In Gipúzcoa, charitable donations are still considered deductible expenses for CIT purposes.

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 unlisted companies or, otherwise, in listed 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 unlisted companies or 3% in listed 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

In the Basque Country, a full participation exemption is established for dividends and income obtained from transfers of shares in resident and non-resident companies in Spain.

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 listed 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 listed 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.

Under the CIT regulations, to comply with the ‘subject to tax’ test, the company that distributes the dividend must be subject to a tax that is identical or analogous in nature to Basque CIT (i.e. Vizcaya) at a tax rate not lower than a nominal 10% rate. Therefore, the tax exemption for double taxation does not apply to companies taxed at a tax rate lower than 10%, even if they are resident in a country which has signed a DTT with Spain.

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 the 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 listed companies), which should be met on the day when the transfer is made.

Under the CIT regulations, to comply with the ‘subject to tax’ test, the company distributing the dividend should be subject to a tax that is identical or analogous in nature to the Basque CIT (i.e. Vizcaya) at a tax rate no lower than a nominal 10% rate. Therefore, the tax exemption for double taxation does not apply to companies taxed at a tax rate lower than 10%, even if they are resident in a country that has signed a DTT with Spain.

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).

Income obtained by PEs

The exemption will not be applied when the PE’s income is tax exempt in the state in which it is located or is taxed by an identical or similar tax to the CIT at a nominal tax rate lower than 10%.

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 listed subsidiaries, and this interest 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.

WHT levied on interest not included in taxable income is not deductible (general 19% tax rate).

Measures to foster companies' capitalisation

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

Reserve to foster business capitalisation

Companies may reduce taxable income by an amount equal to 15% 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 allocated to a non-distributable reserve for at least five years. During this five-year period, the company's shareholders' 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 allocated 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 25% of shareholder's equity for tax purposes at all times.

This reserve is allocated to offset tax-loss carryforwards, in which case the 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 ten 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

In Álava and Vizcaya, companies may reduce taxable income by 65% of annual accounting profits. In Guipúzcoa, the reduction is 60%. These profits should be allocated to the special reserve to boost entrepreneurship and production activities, up to a maximum amount of 45% of taxable income. In addition, the balance of this reserve may not exceed 50% of shareholders' 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.

This incentive is improved by facilitating the application of this tax credit when the annual amount of the investment in new tangible fixed assets exceeds EUR 5 million, even though this investment does not exceed the 10% limit stated above.

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.

Participation in R&D and technological innovation projects

Under Basque legislation, a deduction is applicable for taxpayers participating in the financing of projects made by third parties.

The funder of the project can apply the R&D deductions with the limit of 1.2 multiplied by the amount paid for the project. The excess can be applied by the taxpayer that carries out the project.

Expenses incurred for 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

To benefit from the tax credit for job creation, the average increase in the workforce must be for employees with an indefinite contract and whose salaries are higher than the minimum inter-professional salary, increased by 70%.

In Vizcaya, the tax credit is 25% of the employee's gross salary up to a limit of 50% of the inter-professional minimum wage. In Álava and Guipúzkoa, the tax credit is EUR 7,000 for each employee and financial year. 

To apply the tax credit, the company’s average number of staff with an indefinite contract 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 three years.

Investment in micro, small, or medium-sized companies of new or recent creation, innovative, or linked to the silver economy

25% of the amounts paid for the subscription or acquisition of shares or shareholdings in companies considered as micro, small, or medium-sized companies will be deductible from the tax amount in Vizcaya and Álava.

The tax credit will be 35% of the amounts paid for the subscription or acquisition of shares or shareholdings in innovative companies or those whose corporate purpose is directly linked to the silver economy.

Professional training expenses in relation to the silver economy and the caring economy

A tax credit is applicable in Vizcaya for the performance of vocational training activities in relation to the silver economy and the caring economy. 

The tax credit will amount to 10% of the expenses incurred in each FY or, in certain circumstances, to 15%.

Tax incentives for the promotion of culture in Vizcaya

With effect from 1 January 2023, relevant improvements have been introduced in Vizcaya regarding tax incentives for the promotion of culture. The other Basque territories (Álava and Gipúzcoa) have maintained their previous regulations, without introducing additional amendments.

Investments and expenses in audio-visual works productions

Taxpayers may generate a tax deduction whose calculation base is the production cost and the costs of obtaining copies and advertising costs. The deduction percentages are as follows:

• 60% in the event that the investments made and expenses incurred in Vizcaya, where the company has its tax domicile, exceed 50% of total investments and expenses.
• 50% in the event that the investments made and expenses incurred in Vizcaya, where the company has its tax domicile, represent between 35% and 50% of total investments and expenses.
• 40% in the event that the investments made and expenses incurred in Vizcaya, where the company has its tax domicile, represent between 20% and 35% of total investments and expenses.
• 35% in the remaining cases.

If the work has been shot entirely in Basque, the deduction percentage will increase by 10 percentage points.

The quantitative limit of 50% is applicable to this deduction once the deductions of 70% and 35% have been applied.

In Alava and Guipúzcoa, the deduction is 35% or 45% for works filmed in Basque, and 50% of the investments made and expenses incurred in Vizcaya.

Investments in book publishing

The deduction is 5% of the tax liability.

Deduction for live performances of performing arts and musicals

In Vizcaya, the basis for calculating this deduction will be the direct costs of an artistic, technical, and promotional nature. The amount of the deduction will be 30% of the expenses incurred (40% if the show is in Basque).

The deduction generated in each tax period may not exceed EUR 1 million for each taxpayer, and the amount of the deduction together with any subsidies may not exceed 80% of expenses.

The quantitative limit of 50% is applicable to this deduction once the deductions of 70% and 35% have been applied.

Participation in the financing of audio-visual works and live shows of the scenic and musical arts.

Likewise, in Vizcaya, the possibility is introduced that it is the financiers of the aforementioned projects that generate the above deductions. However, the deduction of the financiers will be totally or partially incompatible with the deductions to which the contributor who makes the audio-visual work or the live show is entitled. In any event, the following requirements must be taken into account:

• This deduction will not be applicable if the financier is linked to the financed party.
• Obligation to sign a financing contract.
• Financiers may not acquire the intellectual property rights of the work or show.
• Deduction limit for the financier: 1.2 of the amounts disbursed.

The quantitative limit of 35% is applicable to this deduction once the deductions of 70% have been applied.

Time limits for the application of tax credits

The temporary limit for the application of the tax credits is increased to 30 years.

Limits on the amount of tax credit applied

In line with the above, the following quantitative limits have been established:

• Tax credits other than tax credits for R&D and technological innovation and environmental conservation and, in Vizcaya, audiovisual works and live performances: 35% of the amount resulting to reduce the taxable base multiplied by the applicable rate in tax credits for the avoidance of double taxation (previously, 45%).
• Tax credits for R&D and technological innovation: 70% of the amount resulting to reduce the taxable base multiplied by the applicable rate in tax credits for the avoidance of double taxation (previously, there was no limit). If the company applies other tax that are not R&D and technological innovation tax credits, the 70% limit will apply on the amount resulting to reduce the taxable base multiplied by the applicable rate in tax credits for the avoidance of double taxation reduced by the tax credits to which 35% limit applies.
• Tax credits for environmental conservation and improvement and for conservation of energy and, in Vizcaya, audiovisual works and live performances: 50% of the resulting amount to reduce the taxable base multiplied by the applicable rate in tax credits for the avoidance of double taxation. If the company applies other tax credits, such as environmental conservation, the 50% limit will apply to the resulting amount to reduce the taxable base multiplied by the applicable rate in tax credits for the avoidance of double taxation reduced by the tax credits to which the 35% and 70% limit applies.

Effective tax rate and minimum tax

The Basque CIT regulations establish a minimum taxation of 17% 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 to R&D and technological innovation and environmental conservation tax credits and, in Vizcaya, audiovisual works and live performances.

However, if an entity maintains or increases the average of its employees with indefinite contracts with regard to the preceding financial year, the percentage of minimum taxation will be reduced by two points.

Thus, 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, enviromental conservation tax credits and, in Vizcaya, audiovisual works and live performances) 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	24	17	15
Small and micro companies	20	15	13

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

The new CIT regulations have also introduced an annual advance payment, which must be self-assessed during the first 25 calendar days of October each year. The prepayment is 5% of the tax base of the last tax period whose filing deadline has expired on 1 October and it is deductible from the effective tax liability. 

Tax groups

The economic agreement with Spain's central government establishes that the same rules should apply to Common Territory and Basque companies regarding the composition of tax groups, the definition of controlling companies 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).
• A Basque tax group of companies indirectly owned by companies that do not form part of the group (non-resident or resident in Spanish Common Territory) can be formed.

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 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 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.

Exit tax regime

In accordance with the provisions of the EU Directive (EU) of the Council, of 12 July 2016, the exit tax regime for cases where there is a change of residence and cessations of PEs is modified from FY 2018 onwards, replacing the deferral regime by a fractionation system (fractioning over tax periods concluded in the five immediate years following the exit).

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 declare these assets. Fines are imposed (a minimum of EUR 10,000) if CIT payers fail to comply with this obligation.