Foreign tax credit
See Foreign income in the Income determination section for a description of double tax relief.
No specific tax relief is established in Spanish law for foreign investors. Relief may be availed of by Spanish and foreign-owned companies alike. The tax relief available under CIT law in Spain is as follows.
Most of the tax relief that has been established to promote certain investments has been eliminated. However, the largest types of tax relief are maintained (tax exemption/deduction to prevent internal and international double taxation, tax credit for R&D, and tax credit for technological innovation).
Tax relief for business activity/place of business activity
- 50% tax credit on CIT levied on income obtained in Ceuta and Melilla through companies established and carrying on activities in these enclaves during a full business cycle because of their specific geographic location.
- 99% tax credit on the CIT levied on income obtained from the supply of local public services, except when the corporation in question is owned, wholly or partially, by a listed/unlisted company or individual.
R&D and technological innovation credits
A 25% tax credit can be availed of for expenses incurred from R&D activities. If the expenses are higher than the average R&D expenses incurred by the company during the previous two years, the tax credit is 42% for the excess amount.
An additional tax credit of 17% can be availed of for staff expenses incurred for staff exclusively carrying out and qualified to carry out R&D activities.
An 8% 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.
A 12% tax credit can be availed of for technological innovation activities.
With effect for tax years starting in 2020 and 2021, the 12% percentage of deduction will be increased by 38 points for expenses incurred by small and medium-sized enterprises in projects starting after 25 June 2020 that involve the implementation of technological innovation activities whose result is a technological advance in obtaining new production procedures in the value chain of the automotive industry or substantial improvements of the already existing production procedures. Entities that do not qualify as small and medium-sized may benefit from an increase of 3% if they collaborate with small and medium-sized enterprises according to the conditions legally set.
R&D and technological innovation tax credits can be excluded from the limits on tax credits applied on tax liabilities (see below for Limits on the amount of tax credit applied), which will have a cost of 20% of the tax credits applied, meaning that, if certain requirements are met, 80% of R&D and technological innovation tax credits may reduce tax liability after double tax deductions and tax allowances to zero, and any excess tax credits (up to 80%) may be refunded by the tax authorities.
The requirements for the exclusion of R&D and technological innovation tax credits from the tax credit limits are as follows:
- One tax period has passed since the tax credit was generated and the tax credit has not been applied.
- An amount equal to the tax credit applied or paid has been allocated to R&D and technological innovation expenses or to investments in tangible fixed assets or intangible assets used exclusively for R&D and technological innovation activities, excluding real property, within 24 months of the end of the tax period when the tax credit was applied or paid.
- The taxpayer’s average number of staff (staff in general or staff assigned to R&D and technological innovation activities) has not decreased between the end of the tax period when the tax credit was generated and the end of the reinvestment period.
- The taxpayer has a report that certifies that the activities are R&D and technological innovation activities or it has made an advance agreement with the Spanish tax authorities regarding the valuation of the expenses and investments of the project.
The following should also be taken into consideration:
- The tax credit applied or paid for technological innovation in accordance with the foregoing comments may not exceed a total of EUR 1 million per year.
- The sum of the tax credit applied or paid for technological innovation and the tax credit applied or paid for R&D innovation in accordance with the foregoing comments may not exceed a total of EUR 3 million per year.
If R&D expenses for the year exceed 10% of turnover, an additional amount of EUR 2 million per year of tax credit for R&D can be applied or paid without limitation and with a 20% discount.
The tax base can be reduced by 10% of the increase in equity made in the preceding year, provided that the equity is maintained for a period of five years (except when losses are made), subject to a limit of 10% of the positive tax base of the period prior to this reduction. If this tax base is insufficient, pending amounts may be offset in subsequent tax periods. To apply this tax relief, a reserve should be allocated for the amount of the reduction, which may not be distributed for a period of five years.
Tax credits for film productions and live performing arts and musical shows
Investments in Spanish feature-length film productions and the production of audio-visual fiction, animation, or documentary series, where physical copies can be produced prior to serialised industrial production, entitle the producer or taxpayers who contribute to their financing to a 30% tax credit on the first EUR 1 million of the tax credit base and a 25% tax credit on any excess tax credit base. The tax credit may not exceed EUR 10 million. The limit of 25% of gross tax payable (see below for Limits on the amount of tax credit applied) is increased to 50% when the amount corresponding to expenses and investments made for this item, R&D, or technological innovation in the tax period itself exceeds 10% of the gross tax liability reduced by international economic double taxation tax credit and rebates.
A territory requirement is introduced, and this tax relief may only be applied for productions mainly carried out in Spain.
For foreign productions, expenses incurred in Spain qualify for a 30% tax credit on the first EUR 1 million of the tax credit base and a 25% tax credit for any excess tax credit base, provided that certain requirements are met. The tax credit may not exceed EUR 10 million. The limit of 25% of gross tax payable (see below for Limits on the amount of tax credit applied) does not apply in the case of this tax credit, meaning that gross tax payable may be reduced in its entirety, and if tax payable is insufficient, the taxpayer may request the difference from the tax authorities in its CIT return.
Taxpayers are eligible for a 20% tax credit for expenses incurred for producing and performing live performing arts and musical shows. This tax credit may not exceed EUR 500,000.
Tax credit for increases in the number of disabled workers
A tax credit can be applied for increases in the number of disabled workers contracted per year on a permanent and full-time basis. The tax credit is EUR 9,000 per contracted worker whose level of disability is 33% or more, but less than 65%, and EUR 12,000 per contracted worker whose level of disability is 65% or more. This increase is calculated by taking the company's average number of staff of each of these categories in the tax year in question that meet the established requirements and comparing it with the company’s average number of staff in the same category in the previous tax year.
Reserve for levelling-off of tax losses
The possibility of reducing the positive tax base of small companies by up to 10% by establishing a non-distributable reserve for the amount of the reduction is introduced (reserve for the levelling-off of tax losses). The reduction may not exceed EUR 1 million and should be reversed in line with the tax losses obtained by the company, subject to a five-year time limit.
Limits on the amount of tax credit applied
The combined sum of all investment tax credits may not exceed 25% of the company’s gross tax payable less deductions for international double taxation and tax relief for income obtained in Ceuta and Melilla, export activities, and local public services. When R&D and technological innovation tax credits and tax credits for film productions and live performing arts and musical shows for expenses and investments in the year exceed 10% of the company's gross tax payable, less the tax credits and relief mentioned above, the limit will be 50%.
In addition, a limit of 50% of gross tax payable is established for the application of deductions for international or internal double taxation (generated or pending application). This limit only applies to companies with a net turnover of at least EUR 20 million.
Time limits for the application of tax reliefs
Tax relief that is not applied in the tax period owing to insufficient tax payable may be applied in tax periods ending in the 15 years immediately thereafter, with the exception of R&D and technological innovation credits, which may be applied in tax periods ending in the 18 years immediately thereafter, and relief for the avoidance of double taxation, which may be applied in the ensuing tax periods with no time limits.
Special tax regimes
Special tax regimes are applicable in, amongst others, the following cases:
Spanish and European Economic Interest Groupings (SEIGs and EEIGs) and Temporary Consortia of Entities (TCEs)
- Spanish Economic Interest Groupings (SEIGs) that meet certain requirements are not subject to Spanish CIT on the part of the taxable income that corresponds to members resident in Spain for tax purposes. Such part of the positive/negative taxable income is deemed to be the profits/(losses) of the SEIG members. The proportional part of tax relief and advance payments are also assigned to the Spanish tax-resident members of the SEIG where they are subject to CIT or PIT. Dividends distributed to SEIG members that have been subject to imputation will not be taxed under CIT or PIT on distributions. Dividends distributed to Spanish non-resident SEIG members are taxed in accordance with the Spanish NRIT law and DTTs.
- European Economic Interest Groupings (EEIGs) are taxed under the above-mentioned regime with the following exception: EEIGs are not subject to Spanish CIT.
If the EEIG is not resident in Spain for tax purposes, Spanish tax-resident members include the corresponding part of the profits/(losses) determined for the grouping, corrected by applying the rules for determining taxable income for CIT or PIT purposes, as applicable. When the activity carried out by the members through the grouping determines the existence of a PE abroad, the rules provided for in Spanish NRIT or in the respective DTT apply.
Spanish non-resident EEIG members are only subject to Spanish NRIT when the activity they perform through the grouping determines the existence of a PE in Spanish territory.
Dividends distributed to Spanish non-resident EEIG members that have been subject to imputation are not taxed in Spain on the distribution.
- Temporary Consortia of Entities (TCEs) are taxed under the SEIG regime. Members of a TCE operating abroad may apply the exemption for double taxation on income obtained by the TCE abroad through a PE or the deduction for the avoidance of international double taxation on income obtained by the TCE abroad. Losses obtained abroad by members of TCEs are not tax deductible.
The special tax regime for restructuring operations is a tax neutrality regime implemented under EU Directive 2009/133. As a general rule, under this regime, asset transfers carried out through such transactions do not have any tax implications (either from a direct, indirect, or other Spanish tax perspective) for the parties involved (transferor, beneficiary, and shareholder), until a subsequent transfer takes place that is not protected by this regime.
The operations that can be taxed under this regime are mergers, global transfers, spin-offs of business units/majority interests, splits, share-to-share operations, contributions of business units, and contributions of assets (this last operation is not fully tax-protected). Each of them must comply with a series of requirements for the application of the regime.
Transfers of registered offices of an EU company or cooperative society between EU member states will not generate any tax for the company/cooperative society’s shareholders on their income, profits, or capital gains.
The tax credit position of a company dissolved as a result of a tax-protected restructuring operation is ‘acquired’ in full by the beneficiary company in the case of universal succession.
The ‘acquired’ tax credits only include tax credits that are obtained in relation to assets transferred in operations where the transferor is not dissolved or the succession is not a full succession for Spanish commercial purposes.
Tax losses may be transferred not only when the transferring company is dissolved but also when a line of business is transferred (in the latter case, only tax losses related to this line of business will be transferred), subject in both cases to certain restrictions.
Financial goodwill arising in a merger operation in which the acquirer owns an interest of at least 5% in the capital of the transferor is amortised for tax purposes at a maximum annual rate of 5% at the level of the Spanish beneficiary company of the merger, provided that such interest was acquired in a tax period that, for the transferor, commenced before 1 January 2015. Amortisation of financial goodwill does not have to be recorded in the income statement for it to be tax deductible.
When the interest has been acquired in a tax period that, for the transferor, commenced on or after 1 January 2015, this tax incentive, which aims to correct double taxation, will not be applicable, as, initially, the whole transferring company's capital gain will benefit from the tax exemption for the avoidance of double taxation, provided that the transferring company is a Spanish CIT payer.
This tax regime cannot be applied if the operation is carried out for the purpose of tax fraud or evasion (anti-abuse clause). An additional anti-abuse clause in line with the clause laid down by the EU directive is established in Spanish law to ensure that the tax regime cannot be applied if the operation is not carried out for valid economic/business reasons, such as the streamlining of activities or group restructuring to gain efficiency, but to obtain a tax benefit. If the tax authorities decide, as a result of its verification procedures, that the special tax regime is not applicable, either fully or partly, as there are no valid economic/business reasons for the operation, the only implication will be that the effects of the tax benefit obtained will be eliminated.
The special tax neutrality regime is applicable by default to restructuring operations. When these operations are carried out, the tax authorities should be notified of the type of operation and, when the case, whether the taxpayer opts not to apply the special tax regime. Failure to notify the tax authorities of this matter is a serious tax offence and carries a fine of EUR 10,000.
For debts incurred to acquire companies, the interest should be deducted for tax purposes taking into consideration the acquirer's operating profits, excluding the operating profits of any company with which the acquirer may merge during the four years following the acquisition. These financial expenses should also be taken into account for the purpose of the general financial expenses limit applicable.
Expenses that are not tax deductible owing to the application of this special rule can be deducted, subject to the above limits, in subsequent tax periods for an unlimited period of time. The limit is not applicable when the debt associated with the acquisition of the interest in the company reaches a maximum of 70% and is reduced, as from 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.
This limit does not apply to restructuring operations carried out before 20 June 2014 or to restructuring operations carried out on or after 20 June 2014 between companies that formed part of the same tax consolidation group in tax periods starting on or after that date.
Tax transparency (under international CFC rules) is not applicable for companies resident in the European Union, provided that the taxpayer can prove that the non-resident company has been set up and operates for valid economic/business reasons and carries out a business activity or that it is a CII regulated in EC Directive 2009/65/CE and not established in Section 54 of the Spanish CIT Act that has been set up and is domiciled in an EU member state.
See CFCs in the Group taxation section for more information.
Venture capital companies and funds
Venture capital companies (VCCs) and funds (VCFs) may benefit from the following tax regime if certain requirements are met:
- Dividends from target companies may benefit from the tax exemption for the avoidance of double taxation, irrespective of the percentage of the interest or the holding period.
- Capital gains arising from transfers of shares in target companies that do not meet the requirements for the application of the tax exemption for the avoidance of double taxation may be 99% exempted from CIT, provided that such shares have been held for a period of between 2 and 15 years.
- Profit distributions to VCC and VCF shareholders may benefit from the tax exemption for the avoidance of double taxation, irrespective of the percentage of the interest or the holding period, if the shareholders are Spanish tax residents or have a PE in Spain. Income from profit distributions to non-Spanish tax resident shareholders without a PE in Spain is not subject to taxation in Spain unless it is obtained through a tax haven. The same regime applies to the transfer of shares in VCCs and VCFs.
Collective Investment Institutions (CIIs)
CIIs are subject to CIT at a reduced rate of 1%, provided that they meet certain requirements. They are not entitled to apply the tax exemption for the avoidance of double taxation on dividends and capital gains arising from the transfer of shares or a deduction for the avoidance of international double taxation. Dividends distributed by these institutions are subject to the general WHT regime. Shareholders are taxed on dividends received from the CII and on capital gains obtained for the transfer of the CII without being entitled to the application of the tax exemption for the avoidance of double taxation on dividends and capital gains arising from the transfer of shares or a deduction for the avoidance of international double taxation.
Financial leasing contracts with a purchase option that may be exercised at the end of the lease period may benefit from a special tax regime if they meet certain requirements. With this regime, the lessee may deduct the following expenses from its taxable income:
- The part of the lease payments that corresponds to the financial charge (interest) paid to the lessor.
- The part of the lease payments that corresponds to the recovery of the cost of the leased object. Tax deductibility for this amount may not exceed the result of applying twice the straight-line depreciation/amortisation rate applicable on the leased object in accordance with the official depreciation/amortisation tables.
Spanish holding companies of foreign companies regime
Spanish resident companies whose corporate purpose includes the holding and management of foreign companies’ shares (called ETVEs in Spain) and that, by law, are not equity companies (i.e. companies that do not carry on a business activity) are granted some tax benefits, subject to compliance with certain requirements.
The tax authorities must be notified of the application of this tax regime.
In addition, the distribution of profits by the holding company to non-resident companies or individual shareholders is not taxable in Spain if such profits come from income generated from non-resident companies and may benefit from the tax exemption for the avoidance of double taxation on dividends and capital gains arising from the transfer of shares or from income obtained abroad through a PE that may benefit from the exemption for the avoidance of international double taxation of income obtained through a PE unless the profits are distributed to a tax haven. Resident company shareholders are entitled to an internal tax credit on dividends under Spanish law.
Small and medium-sized companies
Small and medium-sized companies are eligible for tax relief, such as accelerated depreciation/amortisation or more favourable bad debt provision treatment. To be eligible for this relief, turnover in the previous tax year must not exceed EUR 10 million and, by law, the company must not be considered an equity company. In the case of a group, the turnover of all group companies must be considered for this purpose. Companies that generate a turnover of EUR 10 million that have met the requirements to be considered small and medium-sized companies in the tax period in which they obtained such turnover and in the two previous tax periods may be eligible for this tax relief during the three tax periods immediately after the tax period in which they obtain this turnover.
The applicable CIT rate is the general rate (25%).
Special tax regime for companies that lease housing
Companies whose main business activity is the lease of housing located in Spain that they have constructed, promoted, or acquired may apply a special tax regime that significantly reduces CIT liability, provided that certain requirements are met.
Real Estate Investment Trust Regime (SOCIMI)
A special tax regime is established in Spain for listed companies that make investments in the real estate market (called SOCIMIs in Spain) and meet certain requirements. SOCIMIs apply a 0% CIT rate and have strict profit distribution obligations.
Special economic and tax regime of the Canary Islands
Due to the remoteness and isolation of the Canary Islands, they have traditionally enjoyed a special economic and tax regime with specific economic and tax measures different to those established for the rest of Spain. As a result, they have one of the most advantageous tax regimes in Europe which, in addition, is not affected by the minimum effective tax rate established in the rest of Spain (amounting to 15% of profit). Consequently, the tax incentives that we describe in the following paragraphs can very easily reduce the effective tax rate to around 4% or even less of profit.
Regarding direct taxes, the Canary Island economic and tax regime establishes the following tax benefits for companies and businesses domiciled in the Canary Islands or with a PE in the Canary Islands:
- Up to 90% of annual undistributed accounting profits can be allocated to a special investment reserve and not taxed, provided that they are invested within a four-year period (including the period during which the profits are obtained) in qualifying assets in the Canary Islands or in certain public debt securities or shares in other companies operating in the Canary Islands that invest in qualifying assets.
- Most Spanish CIT credits are 80% higher for companies and businesses located in the Canary Islands, with a minimum differential of 20% (e.g. a 5% tax credit in mainland Spain would be 25% in the Canary Islands).
- The limit of the application of these tax credits on tax liability is also 80% higher in the Canary Islands, with a minimum differential of 35%. The tax liability may be reduced by up to 50% if the tax credit is generated in the tax year. In the case of tax credits generated in prior tax years, the tax liability may be reduced by 70%.
- A 25% tax credit can be availed of for investments in new tangible fixed assets and, subject to compliance with certain requirements, second-hand assets.
- A tax credit of 50% of the CIT liability is granted for taxable income generated from the production of tangible goods while carrying on agricultural, farming, industrial, and fishing activities.
- A tax credit of 90% of the CIT liability is granted for profits of shipping companies generated from ships registered in the Canary Islands Special Ships and Shipping Companies Register. For sailors of such ships, a 50% tax exemption can be applied to PIT levied on their employment income and a 90% reduction to the part of their social security contributions paid by their employers.
- A CIT credit is applicable for companies that make investments in certain countries in Africa. The tax credit is 15% of the investments made.
- Another CIT credit is applicable for advertising expenses incurred for product launches, opening and prospecting of markets abroad, and attending exhibitions and fairs. This tax credit is 15%.
Besides a lower taxation with the Canary Island general indirect tax (IGIC at the general rate of 7%) compared to VAT and the specific IGIC exemptions applicable, companies domiciled in the Canary Islands that are CIT payers and are newly incorporated, start new activities, or improve their existing activities may benefit from the following relief for indirect taxes:
- Exemption from IGIC/transfer tax on supplies and imports of capital goods if the company has a deduction percentage that is not 100%.
- Shipping companies qualify for an exemption from transfer tax for any contracts related to ships registered in the Canary Islands Special Ships and Shipping Companies Register.
- Customs Free areas are available. Upon EU demand, there are restrictions on the application of certain tax relief (special investment reserve, tax credits for production, and new business indirect tax relief) for the following industrial sectors: shipbuilding, synthetic fibres, automobile, iron and steel, and coal.
Canary Islands Special Zone tax regime
In January 2000, a tax regime for the Canary Islands Special Zone (the zone known as the ZEC) was approved by the European Union. The main regulations of this regime, established by the Spanish government, are as follows:
- New companies and branches may qualify for the application of this tax regime and, upon approval by the tax authorities, may register until 31 December 2023 (applying the tax regime until 31 December 2027). This may be extended by the European Union.
- To qualify for this tax regime, the company must comply with the following requirements:
- make an investment in fixed assets of at least EUR 100,000 in Gran Canaria or Tenerife, or EUR 50,000 in Fuerteventura, Lanzarote, La Palma, El Hierro, or La Gomera, within the first two years of their business activity
- create at least five new jobs in Gran Canaria or Tenerife, or three in the other islands
- provide a description of the business activities to be carried out that support the company’s solvency, viability, international competitiveness, and contribution to the economic and social development of the Canary Islands
- establish its registered office and place of effective management in the ZEC
- have at least one company director who resides in the Canary Islands or a legal representative in the case of branches, and
- carry on one of the qualifying business activities.
- The territory where this tax regime can be applied includes all the Canary Islands.
- Companies applying the tax regime may operate outside the Canary Islands through branches if separate accounting books are kept.
- Activities for which the tax regime can be applied include a wide range of industrial and commercial activities, most services and holdings. Credit institutions and insurance companies are excluded, and no stock exchanges are allowed.
- The tax liability on which the ZEC tax regime will apply is determined in accordance with the following rules: (i) companies that meet the requirement of creating a minimum number of jobs may apply the special tax regime on a tax liability of EUR 1.8 million, and (ii) the tax liability on which the special tax regime will be applied is increased by EUR 500,000 for each job created over the minimum threshold, up to 50 jobs. If more than 50 jobs are created, the ZEC tax regime will apply to the full amount of tax liability even if another limit, which in practice is not applied very often, may apply. These thresholds are considerably high and the tax relief is not usually capped. The general CIT regime establishes a 25% tax rate for Spanish companies, whilst the ZEC tax rate applicable to the valid ZEC tax base is 4%.
- Under this tax regime, companies can avail themselves of large tax exemptions for IGIC, transfer tax, and stamp duty, and large reductions and simplified regulations for local taxes.
- Interest and some other returns from moveable goods paid by companies under this tax regime are exempt from Spanish NRIT, except when paid to residents in tax havens.
- Benefits established in the EU Parent-Subsidiary Directive are extended to non-EU residents. These benefits are not applicable when the income is paid to residents in tax havens.
- A fee of EUR 884.52 is payable to register as a company that applies this tax regime, and an annual fee (EUR 1,560.90 for companies in Tenerife and Gran Canaria and EUR 1,352.78 for companies on other islands) is payable to continue to be registered as qualifying for the tax regime.