Tax law in Spain – corporate tax in Spain, including corporate taxes

In the case of companies and other legal entities, the “Impuesto sobre las Sociedades (IS, i.e. corporate tax in Spain) and the municipal trade tax (Impuesto sobre Actividades Económicas, IAE) are levied in particular.

A. Corporate tax Spain (Impuesto sobre Sociedades, IS)

I. The taxable person

Any legal entity that is resident in Spain or has a permanent establishment is subject to tax. A corporation is deemed to be resident if it was founded under Spanish law or has its registered office or effective management (direction and control of all its activities) on Spanish territory. These therefore include all types of commercial companies, including joint stock companies (sociedad anómina, SA), limited liability companies (sociedad de responsibilidad limitada, SRL/SL), partnerships (limited partnerships, simple limited partnerships, general partnerships), investment funds, pension funds and venture capital funds .

Only the taxable income of a civil law company (“Sociedad civil”) is not taxed at the company level. The income is allocated directly to the shareholders and is subject to taxation there.

In the event of a change of residence, the survey period ends at the moment of the said change.

Proof of tax residency in a country is provided by a certificate issued by the tax authorities there. Their validity period is one year.

A partial crediting procedure is used for corporate tax in Spain. Resident natural persons are granted a credit as partners.
As a result of this crediting, dividends are generally only taxed again if income is high.

Companies tax resident in Spain as shareholders receive a tax credit on their own tax on gross dividends.

II. Tax object

As with income tax, taxation under corporate tax in Spain depends on tax residency.

Resident corporations are subject to corporate tax on worldwide income and capital gains. The determination is generally carried out using a direct calculation method based on the accounting documents, exceptionally through an estimate by the tax authorities.

Business expenses related to commercial activity are deductible.

For tax purposes, inventories are generally valued at the lower of acquisition cost and market value. There is a ban on activation for financing costs.

Depreciation is permitted for tangible assets and intangible assets based on their normal useful life, starting from the time of actual use of the respective asset.

Depreciation can be calculated using the straight-line, declining balance or digital depreciation method. The depreciation rates are set in official tables.

The creation of provisions for unrealized losses is permitted under certain conditions, e.g. the provision for doubtful debts or for the devaluation of securities. Provisions are also possible for uncertain liabilities, for the maintenance of ships and aircraft and for the loss of value of inventories.

Capital gains are profits that have been achieved through the sale of assets for consideration, as well as those that have been achieved through a free transfer. Like current commercial income, they are subject to corporate income tax.

Losses can be offset against all income from the same calculation period.

A loss carryback is not possible; since the last change in the law in 2002, a loss carryforward is generally permitted for up to 15 consecutive years (Article 25 LIS - Spanish Corporate Tax Act) (previously 7 years).

III. Tax credits and tax exemptions

The sum of investment credits is currently limited to 35% of the corporate tax liability for the year. Unused credits can currently be carried forward for up to ten years.

Tax credits include: Granted for reinvestment of capital gains, investments in foreign establishments or companies related to export activities, environmental protection, research and development costs and innovations, expenses related to personnel training, cultural assets, activities in the area of the Internet or e-commerce, pension insurance contributions, etc.

Tax exemptions or deductions are granted for the promotion of venture capital investments and certain investments abroad.

There is a nesting privilege for holding companies, under which tax exemptions are granted for the sale of qualifying shares under certain conditions. The distribution of profits to non-resident shareholders is generally exempt from withholding tax.

For the special tax zone of the Canary Islands (ZEC), companies that are entered in the official register of ZEC companies before January 1, 2007 are eligible for special tax regulations under certain conditions that are intended to improve the economic situation of the Canary Islands.

There are various tax incentives in the Basque Country, for example through reduced corporate tax.

IV. Amount of tax and tax assessment of corporate tax in Spain

The general tax rate for income and capital gains is currently 35%. For companies with current sales of less than 8 million euros and profits of less than 120,000 euros, the reduced tax rate is currently 30%

Income from domestic sources is subject to corporate tax if it is earned by companies established or incorporated in Spain. The withholding tax rate on dividends and other profit distributions, on interest and on licenses is currently 18%.

The assessment period is generally the calendar year. However, companies can also submit a declaration according to their financial year.

Corporate tax subjects must hold an annual general meeting within 6 months of the close of the financial year and file a final corporate tax return within 25 days from the date of approval of the annual financial statements.

Trimestral advance payments must be made on the 20th of the month following the trimester, on January 20th. to submit the annual return for the previous year.

B. Corporations corporate tax Spain

I. Group taxation

In principle, affiliated companies are free to consolidate companies for corporate tax purposes. A group consists of a resident parent company and the resident subsidiaries (SAs, SRLs, limited partnerships on shares), which are controlled by the parent company with at least 75%.

In this respect, only the net income of the group is subject to tax; intra-group distributions of dividends are exempt from withholding tax.
II. Intra-group dividends

Intra-group dividends count with the gross amount as part of the recipient's taxable income. A tax credit is given for the withholding tax paid when the recipient's final tax determination is made. There is also the possibility of offsetting corporate tax paid against the recipient's final tax liability.

C. Other taxes

There is a small tax surcharge on corporation tax for the benefit of the local chamber of commerce, which must be paid by all resident companies and permanent establishments in the form of an annual fee.

A tax on economic activity (municipal business tax, IAE) is levied annually for commercial, freelance or artistic activity within Spanish territory (see above).

A tax is imposed on the increase in value of urban land on the seller when it is sold and on the recipient when it is purchased free of charge.

Spain currently does not levy wealth tax on corporations.

A property tax is levied annually by municipalities on the ownership of immovable property. This can be deducted as a business expense.

D. International aspects

I. Resident companies

For resident companies, corporation tax is levied on their worldwide income and capital gains.

If resident companies receive dividends from foreign sources and capital gains from the sale of shares in a non-resident company, these are tax-free under certain conditions.

There is no wealth tax on foreign assets, and immovable property located abroad is not subject to Spanish property tax.

To avoid double taxation of foreign source income, Spain uses two methods: tax exemption and tax credit.

Commercial profits of a resident company through a permanent establishment located abroad are tax-free if the income generated by the permanent establishment is actually subject to a tax comparable to Spanish corporate tax, the permanent establishment is not located in a low-tax jurisdiction and currently at least 85% of the permanent establishment's income comes from the conduct of commercial activities activities abroad. If the conditions for exemption are not met, double taxation is avoided through tax credit.

II. Nonresident Corporations

In general, a permanent establishment of a non-resident company located in Spain is subject to tax on income and capital gains from Spanish sources at the usual rate, currently 35%. In addition, there is an additional tax on transfers of permanent establishment profits of currently 25% for any profit after deduction of taxes that has been transferred from a Spanish permanent establishment to its foreign (non-EU) parent company; This does not apply to the DBA agreements. Within the EU, the so-called parent-subsidiary directive must be observed.

Hidden reserves are realized when a Spanish permanent establishment transfers assets abroad (withdrawal tax).

If a non-resident company does not have a permanent establishment in Spain, tax will be payable on each payment in respect of income and capital gains from Spanish sources, although certain direct income and gains will not be subject to tax.

Non-resident corporations are not subject to wealth tax, but their immovable assets located in Spain are subject to property tax. In addition, non-resident corporations must pay a special tax on immovable property annually in addition to the property tax, although this is not levied under certain conditions.

If a non-resident company that does not have a permanent establishment in Spain generates income from Spain, in certain cases it must appoint a local representative (fiscal representative) in Spain and inform the tax authorities of this. In principle, a tax return must be submitted for each inflow, but for certain income a quarterly return is sufficient. In principle, it is necessary to apply for a Spanish tax number.

There are also provisions to prevent tax avoidance for the sale of immovable property.

III. Withholding tax

Withholding tax is levied on the gross amount of income from Spanish sources for non-residents who do not have a permanent establishment in Spain.

The withholding tax rate on dividends and profit distributions from Spanish sources is currently 18% on the gross amount. Under certain conditions, there is an exemption from Spanish withholding tax (for dividends distributed to qualifying parent companies).

Interest from Spanish sources is subject to a withholding tax rate of currently 18% on the gross amount, and royalties of currently 25% on the gross amount.

Capital gains are generally taxable at currently 35%. Gains from the disposal of holdings in Spanish investment funds are subject to tax at a rate of currently 18% on the net amount.

The relevant DTAs must be observed.

 

E. Avoidance of tax avoidance

I. Transfer pricing

Income and expenses that are related to transactions between affiliated companies or between companies and one of their shareholders or executives must be assessed using arm's length comparisons and corrected in the event of discrepancies. The price comparison method can be used, as well as the cost markup or resale price method as well as the gross profit comparison method or comparable “profit split” methods.

II. Undercapitalization

“Undercapitalization” occurs when losses have reduced the company's assets to less than 2/3 of the capital and a financial year has expired without this situation being eliminated, so that the capital must be increased accordingly (Art. 163 AG).

In “financially critical situations”, especially with loans, it should be noted that a loan operation does not conceal any hidden capitalization and that the interest payments - which have to be made for precisely this reason and are ultimately generally deductible for the borrower as part of the company tax return - are actually there in this case represent non-deductible capital distributions. Therefore, the tax authorities make the irrefutable presumption that the part of the interest amount that represents an “excessive degree of indebtedness” is considered a distribution (Article 20 of the Spanish Corporation Tax Act).

III. Domestic-controlled foreign companies

A resident corporation is also subject to corporate income tax on certain passive income from non-resident legal entities in which it holds more than 50% (system of international pass-through taxation).

IV. Provisions for tax havens

Certain tax exemptions are not granted for companies based in tax havens.

F. Sales tax (Impuesto sobre el Valor Añadido, IVA)

In Spain, the added value created in taxable supplies of goods and services in mainland Spain and the Balearic Islands, as well as the import of such goods into this territory, is subject to VAT. The Canary Islands levy a special type of sales tax (IGIC, Impuesto General Indirecto Canario – General Indirect Canary Tax).

Tax liability applies to natural persons or corporations who make taxable supplies of goods or services.

In principle, tax liability also refers to the provision or delivery of taxable goods or services to Spain as part of an entrepreneur's business, the purchase of goods within the EU and the import of taxable goods into Spain.

The basis of taxation is the remuneration, the purchase price or the customs value, with input tax deducted.

Exemptions apply, among other things, to medical, social, educational and sports services as well as financial transactions and insurance contracts and the rental of immovable property.

The general tax rate is currently 16%, but there are reduced rates for certain goods.

Special tariffs apply to the Canary Islands, with the general tax rate currently being 5%, for which there are both increases and reductions.

For sales tax purposes, the Canary Islands are treated as foreign countries. This means that, due to their special status, no sales tax is generally charged for deliveries from Spain. The Spanish supplier may have to register for VAT there and apply for an identification number. In this case, he must show the applicable indirect tax, IGIC, on his invoices.

Deliveries of goods to Ceuta and Melilla are also treated like deliveries to another third country (e.g. USA). Although some territorial autonomy, such as the Basque Country, have a special tax status, they are national territory and are therefore subject to the normal VAT regulations.

Non-resident entrepreneurs must appoint a fiscal representative and inform the tax authorities about applying for a Spanish tax number if necessary. Foreign entrepreneurs generally have the option of refunding input tax.