Spain

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

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

Inventory valuation

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

Capital gains and losses

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

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

As a general rule (there are certain exceptions), capital gains arising on the transfer of companies resident in Spain in which at least a 5% interest has been held for at least one year are 95% exempt from tax (5% is taxed at the corresponding tax rate). The period during which the interest is held by another group company is also considered for this rule.

Capital losses arising from transfers of shares are only tax deductible if they relate to interests of less than 5% and, in the case of interests in the capital or equity of non-resident companies, the investee company has been subject to and is not exempt from a foreign tax identical or analogous in nature to CIT at a nominal rate of at least 10% or is resident in a country with which Spain has signed a DTT containing an exchange-of-information clause.

Negative income generated in the event that the investee company is extinguished is tax deductible unless the company is extinguished as a result of a restructuring operation.

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

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

Dividend income

Dividends received from resident in Spain companies in which at least a 5% interest has been held for at least one year, including ownership by other group companies, may benefit from a 95% exemption (meaning, if the general tax rate is applicable, the full amount of the dividends are taxable at a rate of 1.25%). Dividends received from resident in Spain companies in which an interest of less than 5% is held are taxable in their entirety for the recipient.

Special rules apply to, amongst others, the following:

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

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

Stock dividends

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

Interest income

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

Royalty income

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

A reduction (up to 60%) may be applied on the net income obtained from licensing some types of intangible assets if certain requirements are met.

Patents, supplementary certificates for the protection of medicines and phytosanitary products, and registered advanced software qualify for the patent box tax incentive. Drawings and models only qualify if they are legally protected.

Commercial or scientific experiences (also known as 'know-how') do not qualify for this tax incentive.

Other significant items

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

• Dividends distributed out of profits obtained by companies in tax periods in which the international flow-through tax regime has been applied are excluded with respect to 95% of the amount involved.
• Assets written up in accordance with revaluation laws and tax-protected restructuring operations involving accounting capital gains.

Foreign income

Tax relief on foreign income

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

This tax relief may be available for the following:

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

The main characteristics of double tax relief are discussed below.

Dividends or profit-sharing income received by a Spanish company from a foreign company may benefit from a 95% exemption (which entails an effective tax rate on this type of income of 1.25% for those entities subject to the general 25% CIT rate), subject to compliance with the following requirements:

• The Spanish company has at least a 5% interest in the foreign/Spanish company that has been held for at least one year. This one-year holding period is complied with if it is completed after the dividend is distributed. The period in which the interest is held by another group company is also taken into consideration for this rule.
• In the case of foreign subsidiaries, the subsidiary must have been subject to a tax of an identical or similar nature to Spanish CIT at, at least, a nominal tax rate of 10% in the tax year in which the distributed dividends/profits were obtained. This requirement is complied with when the investee is resident in a country with which Spain has signed a DTT containing an exchange-of-information clause.
• The tax exemption does not apply for the amount of dividends or profit-sharing income whose distribution generates a tax-deductible expense in the paying company.

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

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

The tax exemption is limited in certain cases.

Special rules apply to, amongst others, the following:

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

As an alternative to this 'tax exemption' regime and applicable to dividend distributions only, a tax credit based on imputation is established. This tax credit allows crediting the foreign tax paid abroad on the income from which the dividends are paid and the foreign WHT paid on the profit distribution, up to the limit of the tax that would have been paid on the 95% gross amount in Spain (only 95% is considered to be consistent with the holding exemption regime).

The only requirement for the application of this 'imputation tax' system is that the Spanish company has at least a 5% interest in the foreign company during the 12 months prior to the date on which the dividend is due and payable. This one-year holding period is deemed to be complied with if it is completed after the dividend is distributed. The tax credit can be carried forward for an unlimited number of years.

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

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