Corporate Income Tax - Part

Four
Ernesto Grijalba Ruiz
Regulations

• Law 27/2014, of November 27, 2014,

on Corporate Income Tax.

• Royal Decree 634/2015, of July 10,

2015, approving the Corporate
Income Tax Regulations.
 Accounting income
+/- Accrual of income and expenses (art. 11 CITA)
+/- Depreciation (Art. 12 CITA)
+/- Renting y Leasing (art. 106 CITA)
+/- Impairments (art. 13 CITA)
+/- Provisions and other expenses (art. 14 CITA)
+/- Non-deductible expenses (art. 15 CITA)
+/- Financial expenses (art. 16 CITA)
+/- Related party transactions (art. 18 CITA)
- Participation exemption (art. 21 CITA)
- PE income exemption (art. 22 CITA)
= PRELIMINARY TAXABLE INCOME

CIT calculation - Capitalization reserve (art. 25 CITA)

- NOLs offset (art. 26 CITA)
- Leveling reserve (art. 105 CITA)
= TAXABLE INCOME
x Tax rate (art. 29 CITA)
= FULL QUOTA
- Double taxation tax credits (art. 31 y 32 CITA)
- Bonifications (art. 33 y 34 CITA)
- Other tax credits (art. 35 a 39 CITA)
= TAX QUOTA
- Withholding and payments on account (art. 40 CITA)
= TAX TO BE PAID OR REFUNDED
 Concept:
Tax benefit consisting of a reduction that is deducted from the preliminary taxable
income. It can be applied by those companies that part of the profits obtained are
not distributed to the shareholders and constitute with those undistributed profits a
reserve, which is called Capitalization Reserve, without the company being able to
dispose of this reserve within 5 years. Therefore, this tax benefit is an incentive for
self-financing as opposed to third-party financing.
On the other hand, it is important to note that the regulations do not require that
the amount of this reserve be invested in a specific type of asset.

Capitalization Requirements:
In order for a company to be entitled to apply this reduction, the following
reserve requirements must be met:
• A reserve, called the Capitalization Reserve, should be set aside for the amount
of the reduction, which should be shown in the balance sheet with absolute
separation and appropriate title.
• The reserve to be endowed must be unavailable within 5 years.
• The amount of the increase in shareholders' equity must be maintained for a
period of 5 years after the end of the tax period to which the reduction
corresponds, except for the existence of accounting losses.
• It must be an entity that is taxed at the general tax rate of 25% or newly created
entities that are taxed at 15%.
 Calculation:
Reduction due to Capitalization Reserve = 10 % * Increase in
Shareholders' Equity
Where: Inc. Shareholders' Equity = Shareholders' equity adjusted at year-
end - Shareholders' equity adjusted at beginning of year
Adjusted shareholders' equity = for purposes of determining the
Capitalization aforementioned increase, shareholders' equity at the beginning and end of
the tax period will not be taken into account:

reserve • Result of the fiscal year.

• Shareholders' contributions / capital increases / increase in shareholders'
equity due to restructuring operations.
• Reserves of a legal or statutory nature.
Thus, Increase in Shareholders' Equity = Increase in Voluntary Reserves with
respect to the previous year.
Limit: 10% of Taxable Income prior to offsetting NOLs
 Example:
A company presents the following data regarding the evolution of
shareholders' equity:
Year 2023 Year 2024
Capital 4.000.000 4.000.000

Capitalization Legal Reserve

Voluntary reserves
Income for the year
800.000
500.000
700.000
800.000
900.000
600.000

reserve Total shareholders' equity 6.000.000 6.300.000

We know that an unavailable reserve has been set aside in the amount
of the Capitalization Reserve Reduction, that the company undertakes
to maintain this reserve for 5 years from the year-end date and that the
increase in shareholders' equity will also be maintained for 5 years,
unless during this period the company records accounting losses. We
also know that the previous taxable income is 3,300,000.
 Example (solution):
Increase in Shareholders' Equity = 4,900,000 (6,300,000 (PF) - 600,000 (RE)
- 800,000 (RL)) -4,500,000 (6,000,000 (PF) - 700,000 (RE) - 800,000 (RL)) =
400,000
Capitalization This is the same as calculating the increase in Voluntary Reserves:

reserve Increase in Voluntary Reserves= 900,000 - 500,000 = 400,000

Amount of Capital Reserve Reduction = 10% * 400,000 = 40,000
Capital Reserve Reduction Limit = 10% * 3.300.000 = 330.000
We can apply the 40,000 reduction by not exceeding the limit.
Capitalization Reserve: Example
Exercise 1
GANAMAS has the following net worth situation on 12/31/2023:
Equity Amount (€)
(100) Capital stock 100.000
(112) Legal reserve 12.500
(113) Voluntary reserves 30.000
(129) Income for the year 45.000
Total Stockholders' Equity 187.500

The COMPANY proposes at the General Shareholders' Meeting, held on April 20, 2024, to
distribute the profit obtained during fiscal year 2023 as follows:
• To legal reserve: 4,500 euros.
• To dividends: 20% of the amount of the result, i.e. 9,000 euros.
• The remainder to voluntary reserves: 31,500 euros.
Finally, the proposal is accepted at the General Shareholders' Meeting and the dividend is
paid on May 24.
It is requested: Determine all the tax implications that will arise for the company
GANAMAS from the above transactions with a view to the liquidation of the Corporate
Income Tax for the year 2024 if it is known that the COMPANY is willing to avail itself of all
the incentives at its disposal to pay less for the Tax.
 Tax Loss Carryforwards (NOLs): These are losses that a company has incurred in previous tax
periods and can be used to reduce taxable income in future periods.

Concept:
Tax loss carryforwards which have been subject to liquidation or self-
assessment may be offset against the positive income of subsequent tax
periods up to a limit of 70% of the taxable income prior to the application of
the capitalization reserve and its offset.
The limits for large companies will be as follows:
NOLs • Total turnover between €20 M and €60 M: 50%;

offsetting • Total turnover over €60 million: 25%.

In any case, tax loss carryforwards may be offset in the tax period up to the
amount of 1 million euros (if the tax period is less than one year, the 1 million
euro allowance is prorated).
Newly created companies do not apply limits during the first three tax periods
in which they have positive taxable income.
 Example:
Company A presents the following results:

2023 2024 2025 2026

Total
turnover 15.000.000,00 25.000.000,00 45.000.000,00 65.000.000,00
Reservation
s 10.000.000,00 15.000.000,00 18.000.000,00 25.000.000,00

NOLs RC
BIP
4.000.000,00
1.000.000,00
2.000.000,00 2.000.000,00
1.000.000,00 5.000.000,00
The NOLs pending compensation at year-end 2023 amount to
6.000.000,00
10.000.000,00

offsetting €4,000,000.
Calculate the reductions to the taxable income in fiscal years 2024 to
2026.
Solution:
2024 2025 2026
Cap Reserve 500.000,00 300.000,00 700.000,00
Limit 100.000,00 500.000,00 1.000.000,00
CR used 100.000,00 500.000,00 900.000,00
CR Pending 400.000,00 200.000,00 -
Limit NOLs 500.000,00 2.500.000,00 2.500.000,00
Franchise 1.000.000,00 1.000.000,00 1.000.000,00
Deductible NOLs 900.000,00 2.500.000,00 600.000,00
BI - 2.000.000,00 8.500.000,00
 Concept: Reduction of the tax base of RSEs that is recovered when they are
loss-making.
Amount: 10% of the amount of the positive Taxable Income after offsetting
the Capitalization Reserve and NOLs.
Limit: 1 million euros (prorated if the tax period is less than one year).
Leveling The reduced amounts will be added to the taxable income of the tax periods
ending in the 5 years immediately following the end of the tax period in which
reserve (RSE such reduction is made, provided that the taxpayer has a negative taxable
income, and up to the amount of the same.

only) The remaining amount will be added to the taxable income of the tax period
corresponding to the date of conclusion of the aforementioned period.
Obligation to set up a restricted reserve until the tax period in which the
addition to taxable income occurs.
The reserve must be charged against the profits of the year in which the
reduction in taxable income is made. If it is not possible to make this reserve,
the reduction will be conditional upon the reserve being charged against the
first positive results of subsequent years for which it is possible to make this
provision.
 Example:
Company A has an Total turnover of less than 10 million euros. In fiscal year
2024 it has had a previous taxable income of 2,200,000. It is entitled to the
application for a capitalization reserve of 350,000 and NOLs pending offset
of 1,600,000.
Previous taxable income: 2,200,000.

Leveling (-) Reduction for capitalization reserve: 220,000

Limit: 10% 2.200.000= 220.000
Reserve (To be applied: 350,000 - 220,000 = 130,000)

(RSE only) (-) Offset of tax loss carryforwards: 1,540,000

Limit: 70% 2.200.000= 1.540.000
(=) Positive taxable income: 440,000
(-) Reduction due to equalization reserve: 44,000
Amount: 10% 440,000=44,000. The entire amount can be applied since it does not
exceed 1 million.
(=) Taxable income: 396,000
The RSE is required to set up a capitalization reserve of 350,000 and an
equalization reserve of 10% of the positive taxable income of 44,000.