Tax credits to avoid double taxation

We are in the middle of the Corporate Income Tax (CIT) filing season for tax returns corresponding to the fiscal year 2021 and it is time to consider the applicable regulations and doctrine concerning this tax.

When your company, resident in Spain, the taxpayer of the CIT and, as such, subject to taxation on its worldwide income, when part of such income has been obtained in another jurisdiction and it has been subject to tax in the State of source, (by a tax similar in nature to Spanish CIT), it goes without saying that such part of income, obtained in the other jurisdiction, will be subject to double taxation, since it will have been taxed first in the country where it was obtained and secondly in Spain, where Spanish CIT taxes the worldwide income of Spanish CIT taxpayers.

✔ In order to avoid such “double taxation” on the same taxpayer, given that two tax administrations from two different countries tax the same income, Spanish CIT regulations foresee a tax credit to mitigate or avoid such double taxation.

✔ When the company does not have enough CIT quote to absorb the tax credit generated in the tax year, it can defer its application to subsequent tax years.

The tax framework between Gibraltar and Spain for companies

✔ The Spanish General Directorate of Taxes concluded, in its binding consultations V4765–16, which should be the order to apply the CIT tax credits and it is as follows:

  • The tax credits to avoid double taxation generated in the same fiscal year must be first applied.
  • If there is enough tax quote to absorb such tax credits, the amount not used in the fiscal year will not be deductible in future fiscal years. That is to say, it only permits their deferral if there is not enough CIT quote.

✔ Following such criterion, the Spanish Central Administrative Court (TEAC) in its resolution of 25 February 2022 considers that the tax credit to avoid double taxation must not be considered as an option that can be elected by the taxpayer but as a tax credit that is mandatory given the wording of the Law that mentions “it will be deducted from the tax quote”.

✔ For this reason, the TEAC concludes that, in the first instance, the tax credit generated in the same fiscal year must be applied. It is not permitted to apply first pending tax credits to avoid double taxation and only partially apply those generated in the same fiscal year, leaving a remaining amount of the same fiscal year ending to apply in future fiscal years.

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Publicado el 07-2022 por PBS