The 2015 Corporation Tax Reform in Spain

In 2015, a few new relevant legal changes have been introduced in the Spanish Corporation Income Tax (“CIT”).

The tax rates for the corporation income tax in 2015 would be 28 %, instead of 30 %. The tax rate is to be further reduced to 25 % as from 2016. However, SME could enjoy in 2015 the 25 % tax rate.

Regarding the taxable income and, more specifically, the participation exemption, the rules in force in 2014 required the subsidiary to be subject to a tax similar to the Spanish CIT or be resident in a country with ta DTT with Spain. The rules in force in 2015 slightly change this requirement in the sense that the subsidiary must be subject to a nominal tax rate of, at least, 10 %.

It is also to be noted that the exemption on capital gains obtained in the disposal of a stake in a subsidiary would also be applicable to domestic companies. Before, it was only exempted the capital gain attributable to the retained earnings of the subsidiary.

Aiming to reinforce the equity of the companies, the new rules state that undistributed profits would not be taxable if retained in the books for five years. However, this relief is limited to the 10 % of the taxable base, so the final effect in the tax payable would be 2.8 % (that is, 28 % * 10 % = 2.8 %). So companies availing this relief would be taxed at an effective tax rate of 25. 2 % or, in case of SME, 22.5 %.

Finally, the indexation allowance previously applicable in case of disposal of real estate has been removed. Now the capital gain arisen on the disposal of these assets will be fully taxable.

With regards to the allowable cost and expenses, there are many changes. The most relevant ones are:

  • The expenses derived from transactions with related parties could only be deducted if the foreign party is subject to a nominal tax of, at least, 10 %.
  • Impairment losses from fixed assets, intangible assets and goodwill will not be allowed.
  • In case of leveraged acquisitions, interest paid on the loans to acquire the target company will not be deductible if such interest is offset against the profits of the target company, either directly (through a merger) or indirectly (group taxation).
  • Hybrid financial instruments would be treated as equity; therefore, interest paid on such instruments will not be deductible.
  • Public relation “PR” expenses would be limited to 1 % of the total turnover

As from 2015, only 60 % of previous year’s losses could be offset against the current tax year taxable profit. Therefore the 18 years carry forward period has been cancelled, so that no time limit would exist to offset the previous year’s losses.

No carryback is allowed, though. But SME’s  are allowed to create a deductible reserve for future tax losses which will be offset able against the current year taxable profit. The reserve could not exceed 10 % of the taxable base and cannot exceed 1 Million Euros. This reserve cannot be distributed and can only be used to cover future tax losses. In case no tax losses occur within a 5 years period from the date the reserve was created, it must be added to the taxable base of the last year .

Finally, the reliefs for reinvested profits have been eliminated..