On March 30, 2012, the Spanish Government approved several tax measures with effect from fiscal years initiated from January 1, 2012.1These measures are included in Royal Decree Law 12/2012 (RDL 12/2012).
Among such measures, there are measures bound to have a significant impact of Corporate Income Tax (CIT) taxpayers, in particular, (i) the derogation of the Spanish thincapitalization regime and enactment of a new regime that introduces a broader limitation in relation with the deductibility of financial expenses incurred in excess of a given level of a Spanish borrower’s adjusted operating profits; (ii) the clarification of the scope of the participation exemption rule applicable in connection with capital gains derived from sales of shares of foreign subsidiaries (iii) the applicability of a reduced tax (at an 8 percent rate) imposed on the realization, in fiscal year 2012, of dividends and capital gains derived from foreign subsidiaries that do not meet the “subject-to-tax” requirement under the participation exemption rules (described below).
Please find below a summary of the mentioned measures, and of other noteworthy measures enacted pursuant to RDL 12/2012, such as a tax amnesty program applicable until November 30, 2012.
Enactment of New Corporate Income Tax Rules Limiting the Deductibility of Financing Expenses
RDL 12/2012 provides for two different sets of limitations to the deductibility of financial expenses, which are described in more detail below:
Non-deductibility of intragroup financial expenses incurred in connection with the acquisition of participations from other Group entities or for the performance of capital contributions into other Group entities
Financial expenses incurred by a Spanish borrower party vis-à-vis a Group lender2 will, in principle, be non-deductible, when such financing expenses were incurred to finance either: (i) the acquisition of participations in entities that were owned by other Group companies or (ii) the performance of capital contributions into other entities belonging to the same Group.
These financial expenses may be taxdeductible, however, to the extent the taxpayer can evidence vis-à-vis the Spanish Tax Authorities the existence of valid economic reasons for carrying out such transactions.
It should be noted that this new rule addresses an old concern of the Spanish Tax Authorities, which related to the artificial generation of tax-deductible expenses as a consequence of intragroup leveraged acquisitions void of economic motivations (other than the generation of tax-deductible interest that could be offset against taxable income of the Spanish borrower party or of the fiscal unity to which such borrower belonged). In recent years, the Spanish Tax Authorities have tried to challenge such structures based on general antiabuse grounds.
General limitation on the deductibility of interest in excess of a given operating profits’ threshold
As noted above, RDL 12/2012 derogates the former Spanish thin-capitalization regime and replaces it by a broader regime that provides for a general limitation for the deductibility of financial expenses incurred by a Spanish CIT taxpayer in excess of a given percentage of its annual operating profits (regardless of whether such financial expenses relate to intra-group indebtedness or not).
As a preliminary remark, it should be noted that in practice, the applicability of the former thin-capitalization regime (which applied only in relation to debt of a Spanish entity vis-à-vis a non-Spanish tax resident related-party lender) was limited as a consequence of certain decisions issued by the European Court of Justice (ECJ) and by the Spanish Courts in the past. At the European Union level, the ECJ decision in the Lankhorst-Hohorst case3 had prompted a reform of the thin-capitalization regime whereby the indebtedness of a Spanish entity in excess of the statutory 3:1 debt-to-equity ratio was not deemed to fall within the scope of the thincapitalization rules in case the ultimate related-party lender was resident within a member state of the European Union (provided that such state was not regarded as a tax haven from a Spanish tax viewpoint). Other recent decisions issued by the Spanish courts have also trimmed the scope of the thin-capitalization rules in cases where the ultimate related-party lender was a resident of a state that had a tax treaty in force with Spain providing for a nondiscrimination clause, which in practice, limited even further its scope.4
The Spanish Tax Authorities have been alerting for the shortcomings of the thin-capitalization regime for a long time, and they have been pushing for a complete reform of such regime based on the guidelines set forth by the Resolution of the ECOFIN Council Meeting of June 8, 2010, which recommended to European Union member states the adoption of thincapitalization rules based on certain methods, among which was a method based on the excess of net interest paid by a company beyond a certain threshold of the earnings before interest and taxes (EBIT) or of the earnings before interest, taxes, depreciation and amortization (EBITDA).
Under the new regime approved under RDL 12/2012, all net financial expenses5 incurred by a Spanish CIT taxpayer in a given year that exceed 30 percent of such company’s annual operating profits (which correspond to the company’s EBITDA with certain adjustments6) will be non-deductible for CIT purposes. It should be noted, however, that the new rules provide for a ‘de minimis’ amount of net financial expenses (i.e. €1 million) that shall be tax-deductible regardless of the level of a company’s operating profits in a given year.
The net financial expenses that are not tax-deductible in a given year as a consequence of the limitation described above (taking into account the ‘de minimis’ deductible amount) may be carried over and deducted in subsequent fiscal years, though. Such non-deductible amounts may be carried over within the fiscal years ending on the 18 years following the fiscal year in which such non-deductible amounts were generated.
In addition, if the amount of net financial expenses incurred by a company in a given fiscal year are below the maximum tax-deductible threshold, the difference between the net financial expenses effectively deducted for CIT purposes and the maximum deductible amount may increase the ‘cap room’ of that company (i.e. the maximum deductible amount deductible under the limitation rules) in the fiscal years ending on the 5 years immediately following the year in which such difference had arisen. In other words, if in a given fiscal year a company had only incurred in €2 million of net financial expenses, and the maximum amount of tax-deductible of net financial expenses in that year was €2.4 million, the difference between the amount of net financial expenses incurred and the maximum tax-deductible threshold (i.e. €400 thou) will be carried over, and will be added to the ‘cap room’ such company will have in the subsequent fiscal year, up to 5 years.
Furthermore, it should be noted that the new rules — unlike the former thin-capitalization rules — do not expressly provide for the reclassification of any financial expenses in excess of the applicable threshold into a dividend. However, it should be noted that financial expenses derived from related-party financing transactions falling within the scope of the Spanish transfer pricing rules, may be subject to secondary adjustments in case such transactions do not comply with arm’s length principles.7
Furthermore, it should be noted that the 30 percent adjusted operating profits threshold amount, in the context of a fiscal unity, should be applicable in connection with the whole fiscal unity (which is regarded as a single taxpayer for CIT purposes).8
Finally, the new regime determines that the abovementioned limitations to the deductibility of net financial expenses will not be applicable:
- To those CIT taxpayers that do not belong to a Group of companies, unless more than 10 percent of such company’s total net financial expenses derive from either: (i) indebtedness that such company has with persons or entities that hold an interest, directly or indirectly, of at least 20 percent in such company; or (ii) indebtedness that such company has with entities in which such company holds an interest, directly or indirectly, of at least 20 percent.
- To financial institutions.9
Finally, and for the sake of clarity, please find below a summary chart comparing the features of the former thin-capitalization regime with the new rules provided under RDL 12/2012:
Click here to view the table.
Clarification of the Scope of the Participation Exemption Regime Upon Transfers of Shares of Foreign Subsidiaries
RDL 12/2012 has also introduced a significant amendment in Section 21.2 of the Spanish CIT Act, introducing a more flexible criterion in order to determine how to apply the participation exemption regime in connection with capital gains derived from sales of shares of foreign subsidiaries.
Under the participation exemption regime, the applicability of a CIT exemption in connection with capital gains derived from transfers of participations in foreign entities generally depends on the fulfilment of the following requirements: a) minimum 5 percent shareholding and minimum 1-year holding period10; b) fulfilment of a subject-to-tax requirement (meaning that the foreign subsidiary should be subject to a corporate-level tax having a nature similar to the Spanish CIT11 ) and c) that at least 85 percent of the foreign subsidiary’s revenues derive from business sources obtained out of the Spanish territory.12 The requirements described in a) should be meet at the time of the transfer, whereas (at least until the enactment of RDL 12/2012) the requirements described in b) and c) above should be met in each and every one of the fiscal years in which the shares of the foreign subsidiary were held. In practice, this requirement meant that failing to meet the “subjectto- tax” and/ or the “business revenues” requirement in a single fiscal year during the foreign subsidiary’s holding period could jeopardize the applicability of the participation exemption in respect of the full capital gain derived from a potential transfer. The literal wording of the participation exemption rule gave rise to great uncertainty among taxpayers.
This concern has been addressed by the amendments to the participation exemption regime performed by RDL 12/2012, as the new rules provide for a method to be applied in case a foreign subsidiary failed to meet the “subjectto- tax” or the “business revenues” test in one or more fiscal years prior to its transfer. This method differentiates between the portion of the capital gain corresponding to the qualifying accumulated (and undistributed) reserves of the foreign subsidiary during the holding period, and the capital gain that did not derive from accumulated reserves (such as e.g., a capital gain attributable to goodwill).
The portion of the capital gain corresponding to accumulated reserves at the level of the foreign subsidiary that corresponds to profits obtained in fiscal years where the “subject-to-tax” and the “business revenues” requirements were met would be fully exempt, whereas the portion of the capital gain relating to profits obtained in fiscal years where such requirements were not met, would not benefit from the participation exemption.13
In order to assess the portion of the capital gain that does not relate to accumulated reserves at the level of the foreign subsidiary that could benefit from the participation exemption, a straight-line method should apply. Under such straight-line method, the capital gain obtained as a consequence of the transfer should be apportioned pro rata among all the fiscal years in which the foreign shareholding was held, and only the portion of the gains corresponding to the number of fiscal years in which both the “subject-totax” and the “business revenues” requirements were met would be fully exempt. The remainder would not benefit from the participation exemption. It should be noted, however, that such apportionment rule is not a iure et de iure presumption, but rather, the CIT taxpayer may defend the applicability of a different apportionment method (provided that such claim is properly evidenced vis-à-vis the Spanish Tax Authorities).
Special Tax On Applicable To Dividends and Capital Gains Derived From Foreign Subsidiaries Not Qualifying For the Participation Exemption Regime
A special tax, at an 8 percent rate, may apply (at the option of the taxpayer) in fiscal year 2012 in respect of dividends and capital gains derived from foreign subsidiaries that meet some of the requirements imposed under the participation exemption rules (i.e. the minimum shareholding, the minimum holding period and the business revenues requirement14 ), but which do not comply with the “subjectto- tax” requirement. In practice, the majority of the foreign subsidiaries that may fall within the scope of this rule will be entities engaged in business activities that are resident in either in tax haven jurisdictions or in non-treaty jurisdictions that do not impose taxes as a consequence of “tax holidays” or due to an offshore tax regime.
The applicability of such special tax constitutes an incentive for the repatriation of proceeds of investments made by Spanish CIT taxpayers in lowtax jurisdictions, as it implies a taxation at a rate (8 percent) that is substantially lower than the ordinary CIT rate (30 percent) that would have applied otherwise.
Extraordinary Tax Amnesty Program
RDL 12/2012 has also approved an extraordinary tax amnesty program whereby certain resident and nonresident taxpayers15 holding rights or assets that were not timely reported to the Spanish Tax Authorities, may be released from their past tax obligations, provided that they pay a special tax (at a 10 percent flat rate) levied on the acquisition value of their unreported rights or assets. Taxpayers benefiting from this tax amnesty program will not be required to pay any penalties, late interest or surcharges in respect of past taxes due. Likewise, taxpayers benefiting from this program will be released from any criminal liability in connection with the non-compliance with their unreported tax obligations (provided that such tax obligations are fully reported under the tax amnesty program).
Taxpayers undergoing a tax audit (or having undergone) a tax audit in respect of such past taxes will not be eligible for this program.
The deadline for applying for the tax amnesty program (and to pay the corresponding special tax due) is November 30, 2012.
Limitation on the deductibility of the amortization of goodwill
The maximum amount of goodwill derived from the acquisition of thirdparty goodwill (either directly or through a corporate restructuring) that may be amortized for CIT purposes has been reduced from 5 percent to 1 percent. This measure extends the same limitation criteria established pursuant to Royal Decree-Law 9/2011 for the deductibility of the so-called “financial goodwill” derived from the acquisition of certain qualifying foreign shareholdings. This measure will apply in respect of fiscal years starting in 2012 and 2013.
Reduction of the maximum amount of tax credits that can be offset against the CIT due
The overall limit for the application of tax credits (excluded the applicability of double tax credits) in fiscal years 2012 and 2013 has been reduced from 35 percent to 25 percent of the gross CIT due, after the deduction of certain domestic and international tax credits and allowances. It should be noted that the calculation of the amount of such overall limitation will also take into account the amount of the reinvestment tax credit applicable by the taxpayer16.
Also with effects in fiscal years 2012 and 2013, the 60 percent limit for the applicability of R&D tax credits and tax credits for investments in IT, is reduced to 50 percent (provided that the amount of such tax credits represent more than 10 percent of the CIT due17).
However, the negative effect of these limitations will be mitigated by the extension of the carry-over period of the pending deductions. In this sense, the general carry-over period is increased from 10 to 15 years (15 to 18 years in the case of R&D tax credits and the tax credits for investments in IT).
Minimum CIT prepayments for large enterprises
RDL 12/2012 introduces, for taxpayers subject to the pay-as-you-earn rules for CIT prepayments (which are mandatory for taxpayers having transacted business — for VAT purposes — for an amount higher than €6,010,121.04 during the preceding 12 months), a minimum CIT prepayment obligation for prepayments due in fiscal years 2012 and 2013. Companies subject to the pay-as-youearn CIT prepayment obligation having an annual turnover (in the 12 months preceding the first day of the 2012 and 2013 fiscal year) exceeding €20 million, must make a minimum CIT prepayment equivalent to (i) 8 percent of their net profits (reduced by any net operating losses pending to be offset18) during the corresponding CIT prepayment period; or (ii) 4 percent of their net profits (reduced by any net operating losses pending to be offset), in case at least 85 percent of the taxpayers’ revenues during the applicable CIT prepayment period can benefit from the participation exemption regime or from a full domestic double tax credit.
Special reduced CIT prepayment rates of 4 percent and 2 percent apply for the advanced payment which falls due in April 2012.
The refund of the excess CIT prepayments over the final CIT due by a taxpayer may be claimed when its annual CIT return is filed (for entities having its fiscal year ending on December 31, in July of the following calendar year).