The Spanish tax authorities’ view on the application of tax credits in Spanish tax consolidation groups

The Spanish tax authorities (STA) have recently issued a note on the application by the tax consolidation group of tax losses and deductions from previous years.

This note has been approved by the Spanish General Directorate of Taxes (GDT) through a report issued upon request of the Head of the Tax Audit Department within the STA.

With regard to the distribution of tax losses and tax reliefs of the group, in the event of the loss of the regime, its extinction, or if one of the companies forming part of it leaves the group, the following criteria are established:

• They remind us of the distribution rule established by the applicable regulations, according to which pending tax reliefs are distributed between the companies that no longer pertain to the group in the proportion in which they contributed to them.
• This proportion is determined at the time the tax relief is generated.
• The distribution rule is mandatory; hence, the taxpayer cannot consider that the group’s tax loss compensation, for example, corresponds to one single entity and not to the rest.
• This criterion had already been recognised by the GDT in the reply to the consultation 0205-02, of 08 February 2002. The STA has now considered it worth reminding of this criterion given that the answer was not binding, and the length of time since then.

In relation to the compensation of pre-consolidation tax credits; that is to say, tax losses and tax credits generated by companies of the group prior to entering into it:

• Spanish CIT regulations permit their application by the group although it is required that the company that generated these tax reliefs contributes to the group with the necessary positive tax result or quote that would have permitted taking advantage of such tax reliefs on a stand-alone basis.
• In this way, a double limit applies: the one applicable to the entity that generated these tax reliefs and a second limit that corresponds to the group.
• The minimum compensation of 1 million euro, which operates as an exception to the percentage limits applying to the use of tax losses carried forward and that depend on the entity’s turnover, also applies to a pre-consolidation tax loss. For such a purpose, it is necessary that the entity that generated them contributes, in the fiscal year of utilization, with a positive tax result in the necessary amount for such compensation.
• A further aspect to be considered is the STA interpretation with respect to the utilization of pre-consolidation pending tax losses and tax credits when the same legal entity has contributed to generate the group’s pending tax losses and credits and plans to use both tax reliefs (the group’s as well as pre-consolidation). In such a case and in order to quantify the maximum limit of pre-consolidation tax reliefs that the entity can use, it is necessary to take into account the tax losses and credits that the group utilizes in the fiscal year and to which such entity has also contributed.
  The STA substantiates such interpretation on the wording of the Laws, though it is not so explicit as the STA interpret, as well as on the purpose of the limitation to the application of pre-consolidation tax reliefs, as it only permits it in so far as their application had been possible if the company that has generated them had not formed part of the tax group.

All these aspects will have to be taken into consideration in the forthcoming Corporate income tax season.