Deduction of financial expenses in Spain in 2015

Posted on Posted in Publications, Tax

 

The Spanish Corporation Tax Reform for 2015 has introduced a few relevant changes regarding the deduction of interest by Spanish companies. This post explains the new legal and tax framework of this matter, focusing on the 30 % limit.

Net financial expenses are deductible up to a limit of 30 percent of operating profit for the year.

The term net financial expenses is the interest accrued minus interest earned for the year. However, nondeductible interest expenses are disregarded for this purpose. In this respect, there are three kind of nondeductible interests:

  1. Interest paid to individuals or entities resident in low tax jurisdictions, unless it can be probed that there are genuine business reasons behind the transactions.
  2. Interest paid to related parties which are taxed in the hands of the beneficiary at a nominal tax rate lower than 10 %
  3. Interest paid to other group companies for loans used to finance the acquisition of companies pertaining to the same group. In other words, internal loans linked to intra-group reorganizations.

So the net financial expense for the year should be re-written as follows: interest accrued minus nondeductible interest minus interest earned.

The operating profit results from the revenue less operating expenses before depreciation and amortization, the allocation of subsidies for non-financial assets and other, impairment losses and loss on disposals of assets. Therefore, operating profit for these purposes is basically the EBITDA. It should be noted that dividends from qualified subsidiaries must be included in the operating profit. Qualified subsidiaries are those in which the tax payer has a percentage of ownership, direct or indirect, is at least 5 percent, or the acquisition value of the participation exceeds 20 million euros.

In any case, net financial expenses for the tax period amounting to 1 million euros are always deductible

Net financial expenses exceeding the above limit and, therefore, not deducted in the tax period can be carried forward and may be deducted in the following tax periods, together with these year`s interest and subject to  the same limit.

In the event that the net financial expenses for the tax period did not reach the limit laid down above, the difference between the limit set and net financial expenses for the tax period shall be added to the limit of the tax periods ending in 5 immediate and subsequent years, until the difference is deducted.

One important new limitation for 2015 onwards regards leveraged acquisitions.

Thus, interest of debt for the acquisition of shares in the capital or equity of in a company shall be deducted with the additional limit of 30 percent of operating profit of the holding company. The part of the holding company’s operating profit that could be attributable to entities merged with it in the four years period following the acquisition, must be ignored except in the case of tax protected mergers.

As already said, this additional limit only applies to leveraged acquisitions.  Leveraged acquisitions are deemed to be those financed with debt in 70 % or more of the acquisition price. Furthermore, when the acquisition is financed with debt not reaching 70 % of the price of the target company but exceeding 30 % thereof, the debt must be reduced to 30 % in the 8 years period following the acquisition of the target entity.

As explained before, the non-deductible interest expense resulting from the application of these provisions can be carried forward.

The limitations to the tax deduction of interest will not apply to banks and other credit institutions and insurance companies.

Finally, it is also to be noted that hybrid financial instruments are treated now as equity; therefore, interest paid on such instruments will not be deductible.