The new legislation will be applicable for fiscal years starting as from 1 January 2015, although some new measures will only be effective as from 2016.
The main objectives of this tax reform are:
- on one hand, the alignment of the Spanish tax legislation with OECD and European Union Commission recommendations, such as Base Erosion and Profit Shifting (BEPS), transfer pricing guidelines and anti-abuse provisions
- on the other hand, the reactivation of the Spanish economy, mainly through new measures in order to reduce individuals' tax burden.
The draft bill is currently under discussion in the Spanish Parliament and will probably be approved in December.
The reform will also affect personal income tax, non-residents income tax, VAT and the General Tax Law.
In this article we will focus on corporate income tax, taking into account that the existing law will be abolished and a new law will be approved.
1. Valuation of assets
In regard to valuation of assets, the proposed new legislation introduces relevant changes.
First of all, in order to broaden the taxable base, the new provisions set forth that impairment of assets (tangible, intangible, real estate and participations in subsidiaries) will not be tax deductible until they are sold to third parties or during their useful life through depreciation.
As regards amortization rates, the depreciation tables in the tax regulations would be simplified, since the existing ones are quite old and in some cases it is very complicated to know which rate is applicable to a given asset.
In regard to intangibles, the new legislation provides the tax deductibility of their amortization even in case of acquisitions from related parties (this is not allowed under the current legislation).
2. Tax deductible expenses
As said before, in response to the BEPS initiative, a special anti-abuse provision for hybrid instruments would operate to prevent the deductibility of expenses incurred in transactions with related parties where, as a result of different tax characterizations, either (i) income would not be subject to tax; (ii) no income would be generated; or (iii) the income would be subject to a nominal tax rate below 10 percent.
In connection with such provision, the law sets forth that the participation exemption regime would not apply in regard to dividends received if such dividends are tax deductible for the entity making the distribution.
In addition to such anti-abuse provision, intra-group profit sharing loans would be characterized as equity instruments for Spanish tax purposes. Consequently, expenses derived from the same would not be tax deductible for the borrower. In line with such tax treatment and under certain circumstances, interest income deriving from intra-group profit sharing loans would qualify as dividend that would be exempt for the lender under the participation exemption regime.
Customer or supplier entertainment expenses would be deductible only up to 1 percent of turnover even if the company can prove that such expenses are directly related to the generation of taxable income.
3. Interest deduction limitation
The existing general limit on the deductibility of net financial expenses (30 percent of EBITDA) exceeding € one million remains unchanged. However, the 18-year-period for the use of exceeding interest expenses is eliminated, so they would be able to be carried forward indefinitely.
Further to such limitation, in case of leveraged acquisitions and in order to restrict debt push-down structures by means of tax consolidation or a merger, an additional limit would be introduced.
This restriction will consist in limiting the deductibility on interest on loans to purchase shares (acquisition debt) to 30 percent of the acquiring company's EBITDA, without including the profits of the acquired business. Additional rules are introduced so that such limit applies where the acquired and acquiring entities are merged within a four-year period or join the same tax group.
The new legislation foresees an escape clause under which that limit would not apply in the acquisition year if the acquisition is not more than 70 percent debt-financed and would not apply in the following years in which at least 5 percent of the acquisition debt is amortized until the acquisition debt does not exceed 30 percent of the total consideration.
4. Tax losses carry-forward
There are relevant tax changes in regard to the use of carry-forward losses.
First of all and as already applicable in other European jurisdictions, the tax losses would be able to be carried forward indefinitely.
The current temporary measure which limits the use of tax losses from previous years is finally introduced in the law as a general rule: As from 2016 (in 2015 the current limitations are still applicable), tax losses from prior years could be offset against only up to 70 percent of the taxable base (with minimum threshold of €1 million).
Although under Spanish tax legislation the statute of limitation period is 4 years, the new legislation sets forth that tax losses could be audited by the tax authorities for a period of 10 years.
Finally, the current change of control restriction is amended and its scope extended. As from 2015, the use of tax losses of an acquired entity would be disallowed if:
- that entity is dormant for 3 months (currently 6 months) or
- within the 2 years after the change of ownership, such entity engages in a different or additional activity, making the turnover higher than 50 percent of the average of the prior 2 years or
- the entity is a pure holding company (sociedad patrimonial) with no human nor material resources for carrying out economic activities.
5. Other relevant amendments
Other amendments introduced in the new legislation are summarized below:
- Losses arising in intragroup transfers of tangibles, intangibles, real estate and participations are not tax deductible until (i) such asset is sold to a third party, or (ii) the seller or the purchaser leaves the group of companies, or (iii) the asset is written down from the balance sheet.
- In regard to related party transactions, the new legislation modifies one of the related party situations: shareholders and entities would be deemed to be related parties in case of a participation of at least 25 percent (currently, 5 percent).
- The Spanish participation exemption regime is extended to Spanish subsidiaries and is improved for foreign subsidiaries.
- Certain amendments are also introduced in relation to the Spanish Controlled Foreign Companies (CFC) regime, including, among others, additional substance requirements to be met by the foreign subsidiary in order to avoid the imputation of the foreign low-taxed income.
- One of the most relevant amendments to be introduced is the change of the existing 30 percent tax rate: it will be reduced to 28 percent in 2015 and to 25 percent in 2016 onwards.
- Following the recommendations from the European Union in regard to the elimination of tax credits, the existing one for reinvestment of extraordinary profits (12 percent of such profit) is abolished.
- Finally, with the aim to strengthen the capitalization of companies, the new legislation introduces a capitalization reserve pursuant to which companies can reduce their taxable base in an amount equal to 10 percent of the retained earnings of a given year (up to 10 percent of the taxable base) provided such retained earnings are not distributed in a 5 year period.
6. Tax consolidation
Although the tax consolidation regime remains nearly the same in terms of calculation of the tax base, there are several relevant changes in regards to the composition of the group.
In addition to the minimum 75 percent participation on the subsidiaries to allow them to form part of the group, the law will also require a minimum of 50 percent of voting rights in such entities.
In line with several EU court cases, the Spanish legislation will extend the scope of the tax group concept in order to allow:
- that subsidiaries held indirectly through a foreign intermediary company could form part of the tax group; and
- horizontal tax consolidation: Spanish direct or indirect subsidiaries of a common foreign parent company would be able to form a Spanish tax group.
Finally, permanent establishments of foreign companies would be able to form part of a tax group, not only as a dominant entity but also as a member of the group.
7. Tax neutral regime for reorganizations
No relevant amendments are introduced in the tax neutral regime, which is regulated by a European Union Directive. The main changes are of a technical nature and in accordance with other changes already mentioned during this article:
- On one hand, no merger goodwill nor assets step-up will be recognized for tax purposes, which is consistent with the participation exemption regime applicable on the transfer of Spanish subsidiaries (but not with taxation on individuals).
- On the other hand, tax losses carry-forward can be transferred together with a branch of activity to the acquiring entity (mergers, partial or total spinoffs and contributions in kind). Under the current legislation, this is only possible in case the company owning the tax losses is extinguished (mergers and total spin-offs).