In its recent Tax Reform, Spain has introduced some important changes to its corporate income tax regime affecting tax rates, interest deductions, set-off of losses and groups of companies, effective 21 January 2015.

  • Reduction in corporate income tax rate
  • Corporate Income Tax ("CIT") rate will decrease from the current rate of 30 percent to 28 percent in 2015 and to 25 percent as of 2016.

Deduction of interest payments restricted

With regard to financial expenses, the Tax Reform includes an important modification to new intra-group profit-participating loans interest payments on which would be treated as non-deductible expenses, following the OECD proposals on hybrids as part of the BEPS project. There is also a new restriction on interest deductibility affecting LBOs with high leverage that will prevent the traditional offsetting of interest expenses derived from the leverage against the income generated by the acquired (target) entity, either through a post-acquisition reorganisation (merger) or a tax consolidated regime. This new restriction will not be applicable when the leverage does not exceed 70 percent of the acquisition price, nor for subsequent years provided the debt is reduced by 5 percent on an annual basis, until it reaches 30 percent of the acquisition price.

Off-set of tax losses

Regarding NOLs, the current 18 years limitation for offseting tax losses is eliminated and as a result NOLs can be offset indefinitely. However, the right of the Tax Administration to asses tax losses pending offset will be extended to 10 years.

Other changes

The Tax Reform introduces a new exemption regime for dividends and capital gains derived from the transfer of shares where the Spanish corporate shareholder keeps a stake of at least 5 percent in subsidiaries subject to a nominal tax rate of more than 10 percent.

Anti-abuse provisions with regard to the Parent-Subsidiary tax exemption are introduced requiring business reasons and effective exchange of information in addition to the minimum shareholding requirements.   

Finally, from 1 January 2015, it is possible to include in a Spanish Tax group subsidiaries controlled by non-Spanish parent companies provided they have directly or indirectly 75 percent of the share capital or 70 percent in case of listed companies (Spanish horizontal groups). Furthermore, Spanish permanent establishments will be able to form part of a Spanish tax group.