Recent Spanish tax authorities criterion on the Capitalization reserve in Spanish Corporate tax Law

In the middle of the Spanish Corporate income tax season, the Spanish tax authorities have included a clarification in the Practical Handbook of this tax, which is available in the Hacienda web page, in relation to the computation of the capitalization reserve in the company’s equity, in order to determine the equity increase as well as its maintenance of the companies willing to apply this benefit.

Lets us remind you that, with this measure, the Spanish legislator aims at promoting companies’ financing through the capitalization of profits obtained, allowing the reduction of their tax burden.

✔ It consists of a Corporation tax relief that permits companies reducing their taxable base in the amount of 10% of the undistributed profits obtained in the immediately preceding fiscal year.

✔ For such a purpose, the following requirements need to be met:

  1. The amount of undistributed profits must be maintained in the company’s equity during a five years period as from the end of the fiscal year in which this tax relief is applied.
  2. A restricted reserve (the “Capitalization reserve”) in the amount of the tax relief, must be provided and it has to be kept during the term of maintenance of the company’s equity.

✔ The basis of this tax relief is, therefore, the equity increase as it is defined by the tax regulations. Hence, the importance of knowing how to clearly determine which accounting items form part of it or not, for tax purposes.

For example, the legal reserve is not taken into account to determine the equity at the beginning nor at the end of the fiscal year. The reason for not including it is that, since it is a mandatory reserve by law, it does not make sense to reward as a positive behaviour its provision by taxpayers.

For the same reasoning and as the capitalization reserve is also mandatory, the controversy has emerged as to whether or not it has to be included in the company’s equity of the beginning and of the end of the fiscal year.

✔ With the last version of the Corporation tax handbook, the Spanish tax authorities try to settle the controversy that had arisen due to the different editions published. They clarify that the capitalization reserve forms part of the equity existing at the beginning and at the end of the fiscal year in the same way as the rest of accounting items of the shareholders’ equity, in order to determine its increase and further maintenance.


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