INCOME TAX TO PAY AS SPANISH RESIDENTS – COMPANIES – CORPORATE TAX
The Corporation Tax (IS) is a tax on the income of companies and other corporate structures that are resident in Spanish territory.
This Tax is regulated based on the following regulations:
. Corporation Tax Law
. Corporation Tax Regulation.
1.- WHICH ENTITIES ARE SUBJECTED TO THIS TAX?
There is a general rule by which all companies are obliged to file the declaration of this tax, regardless of whether or not they have developed activities during the tax period (one calendar year), and even if they have not obtained income subject to tax.
– WHAT HAPPENS IN COMPANIES THAT ARE CONSDIERED AS “INACTIVE”?
A company is considered “inactive” when it has no economic activity.
In other words, the company has not performed any transactions because:
* It is a recently created company. In other words, it is incorporated but has not yet started its activity.
* Company already created but which has ended its activity. The reasons why the company has stopped working can be several. The most common reason is in the case that the partners no longer wish to continue developing the activity of the company, but they want to wait to liquidate it and dissolve it because they hope that it will be reactivated in the future. In this way, the partners avoid the procedures and expenses derived from having the company active.
The regulations in this regard say that companies must be liquidated when more than a year has passed since they have completed the activity. Therefore, once this period has passed, it must be liquidated and finally dissolved.
Therefore, inactive companies, when the period of inactivity is extended too long, can cause problems.
However, even declared as “inactive”, the company has certain formal obligations to fulfill:
1.-Keep VAT registration books: Once the company has been declared “inactive”, it has no obligation to generate and keep VAT registration books, since it has stopped issuing and receiving invoices. However, it is necessary to keep them because the administration can request their review and control up to four years later.
2.- Deal with Corporation Tax: All types of companies, active or inactive, must submit Corporation Tax. In the case of inactive companies, they must present this tax indicating their inactivity situation, and their accounting result will be «0».
3.- Other obligations: Inactive companies are obliged to carry out all procedures as if they were active. Thus, for example, there is the obligation to keep the accounting, the legalization of books, etc. There is even the obligation to formulate the Annual Accounts by the administrators, and the General Meeting of partners must approve them. Furthermore, it is essential that the Annual Accounts are deposited in the Mercantile Registry. The penalties for not complying with these may arise up to 60.000 EUR.
– WHEN A COMPANY IS CONSIDERED AS “RESIDENT” IN SPAIN?
Companies that meet any of the following requirements are residents in Spanish territory:
- That they had been established in accordance with Spanish law.
- That they have their registered office inside the Spanish territory.
- That they have the headquarters of effective management in Spanish territory (when it is in Spain where the management and control of all their activities is located).
– TO WHAT TYPE OF COMPANIES DOES THE TAX APPLY?
Every type of legal companies are taxpayers of Corporation Tax (except civil companies that do not have a commercial purpose) and certain entities, even if they do not have legal personality,.
2.- WHAT IS THE TAX RATE?
The tax base is obtained through the company’s accounting results/balance. So, it is to this accounting balance that the tax rate will be applied.
– QUOTE/RATE TYPES
It will be applied in the first tax period in which the tax base is positive (that is, there is a profit and we have to pay corporate tax) and in the next.
- General quote/rate: 25%.
- Reduced quote/rate of 15% for entrepreneurs. Recently created companies may apply this reduced rate for TWO YEARS (the year in which the activity begins and the following year) if they meet certain requirements:
– That the economic activity of the company has not been carried out previously by other persons or related entities.
– That the economic activity has not been carried out, during the year prior to the establishment of the entity, by a natural person who holds a participation, direct or indirect, in the capital or equity of the newly created entity greater than 50 percent.
Patrimonial companies are excluded from this reduced tax.
- 20% reduced quote/rate for cooperatives: This quote/rate is applicable in tax-protected cooperative companies, except for extra-cooperative results, which are taxed at the general quote/rate of 25%.
3.- HOW IS THE TAX TO PAY CALCULATED?
The corporation tax is calculated from the accounting result in the fiscal year of the company, that is:
INCOMES – EXPENSES – DEDUCTIBLE EXPENSES
There is a long list of expenses related to the development of the activity and that are deductible, such as purchases, services, wages and salaries, social security, rentals, repairs, insurance, travel and transportation, advertising, financial expenses, supplies, representation expenses commercial, and a long etcetera.
For an expense to be considered as “deductible”, it must respond to a “real economic” fact, that is, the accounting entry must correspond to a transaction actually carried out and not simulated.
In addition, the expenses must meet the following requirements:
- Accounting: they must be accounted for in the profit and loss account, or in a reserve account, except in the case of items that can be freely amortized and other cases in which the regulations expressly indicate that their accounting is not necessary.
- Justification: they must be justified by the invoice that meets the requirements established by the Billing Regulations in both cases.
- Imputation: in general, they must be imputed in the tax period in which they accrue. The rule includes two exceptions that allow income and expenses to be allocated for tax purposes in the tax period in which they have been accounted for, provided that this does not result in a lower tax rate than that which would have corresponded if it had been charged in the accrual period.
- Correlation with income: they must be carried out in the exercise of the activity in order to obtain income, without being considered liberality, in which case it would not be deductible.
For the purposes of Corporation Tax, only those expenses that:
– Have been correctly accounted for in the accounting accounts
– Correspond to «real» activities
– Have been carried out in the accounting year
– They are duly justified
– These are not expenses expressly considered «non-deductible».
Regarding the expenses that are expressly considered as «non-deductible», that is, those that the same law does not accept to be deducted from the amount to be paid from the Tax, are the following:
- Those that represent a remuneration of own funds.
- Those derived from the accounting of Corporation Tax. That is, the amount paid for the tax.
- Penal and administrative fines and penalties, and surcharges for filing returns after the deadline.
- Gambling losses.
- The expenses of actions contrary to the legal system.
- The expenses corresponding to transactions carried out with persons or entities resident in tax havens.
- Financial expenses accrued in the tax period, derived from debts with group entities.
- Disproportionate expenses derived from the termination of the labor or commercial relationship that exceed certain limits.
- The expenses corresponding to transactions carried out with related persons or entities that, as a consequence of a different tax classification in these, do not generate income or generate income exempt or subject to a nominal tax rate of less than 10%.
– ADJUSTMENTS ON THE CALCULATION OF THE TAX
To calculate the amount to be paid for the Tax, a series of corrections or adjustments must be made that are generated by the use of different calculation criteria applied in accounting with respect to those allowed by the Tax Administration.
At this point, we have to be clear about the concepts of «accounting criteria» and «tax criteria», as well as «accounting close» and «tax close» for the year.
These corrections or adjustments can be both POSITIVE and NEGATIVE, and can be caused by differences of a TEMPORARY or PERMANENT nature.
A clear case would be, for example, the payment of a TRAFFIC FINE. This expense is recorded in accounting because it has been paid by the company. However, we CANNOT deduct it from the tax payment because it is considered a “non-deductible” expense.
The accounting profit/balance will have to add and subtract the permanent differences between the accounting and tax profit.
– What are related-party transactions?
They are the transfers of goods and / or services that are carried out between related parties (not independent from each other).
The Corporation Tax Law establishes the following related-party assumptions:
- When they are carried out between the Entity and its partners, when the participation of the society of these partners is at least 25%.
- When they are carried out between the Entity and its directors or administrators
- When they are carried out between the Entity and relatives up to the third degree of consanguinity (spouse, children, parents, siblings, grandchildren, grandparents, nephews, …) of the partners (participation of at least 25%), directors or administrators.
- When they are carried out between Entities belonging to the same group of companies.
- When they are carried out between the Entity and the directors or administrators of another company that is part of the same group of companies.
- When they are carried out between the Entity and another company in which the former indirectly owns at least 25%.
- When carried out with Entities in which the same partners, directors, administrators, or their relatives up to the third degree, participate in at least 25%
- When they are carried out between the resident Entity in Spain and its permanent establishments abroad.
IMPORTANT: Transactions carried out between related persons or entities will be valued at their “normal market value”. Normal market value shall be understood to be that which would have been agreed upon by independent persons or entities under conditions of free competition.
4.- TAX DECLARATION MODELS
- Model 200: Annual Corporate Tax Return. It is presented between July 1 and 25 of each year. It must also be presented if the company is inactive.
- Model 202: Statement of Fractional Payment of Companies. It must be presented if a benefit has been obtained in the previous year. They are presented in the first 20 days of April, October and December.
- Model 220: This form is used for groups of companies.
INCOME TAX FOR NON INVIDUALS AND COMPANIES NON-RESIDENTS IN SPAIN
a) Incomes obtained through permanent establishment
A non-resident individual or company acts in Spain through a “permanent establishment” in the following cases:
– When it has in Spain, by any title and continuously or regularly, facilities or workplaces of any kind, in which all or part of the activity is developed.
– When they are acting in Spain through an authorized agent, who contracts in the name and on behalf of the non-resident entity, provided that he regularly exercises said facutlies.
Specifically, permanent establishments are management headquarters, branches, offices, factories, workshops, warehouses, shops or other establishments like mines, oil or gas wells, quarries, agricultural holdings, forestry or livestock or any other place of exploitation or extraction of natural resources and construction. Also, installation or assembly works whose duration exceeds six months.
An foreign resident entity owns some land destined to a mine in Spain.
1.- Tax base
The Base of the Tax of the permanent establishment will be determined in accordance with the provisions of the General Corporate Tax Regime, without prejudice to the following:
– Every payment that the permanent establishment makes to the head office, or to any of its permanent establishments as fees, interests or commissions paid in consideration of technical assistance services, or for the use or transfer of goods or rights will not be deductible.
– However, the interests paid by the permanent establishments of foreign banks to their headquarters or to other permanent establishments to carry out their activity will be deductible.
– The reasonable part of the management and general administrative expenses corresponding to the permanent establishment will be deductible, provided that the requirements established by law are met. Taxpayers may request the Tax Administration to determine the valuation of the aforementioned expenses that are deductible.
– In no case will amounts corresponding to the cost of the entity’s own capital (interest and other financial charges), directly or indirectly, be attributed to the permanent establishment.
2.- Tax rate
The tax rate of 25% will be applied to the tax base.
A supplementary rate of 19 % will be required on the amounts transferred from the eventual incomes obtained in Spain by the permanent establishment, with he following exceptions
– Entities with tax residence in States of the European Union which are not considered as tax havens.
– Entities with tax residence in a State that has signed an agreement with Spain to avoid double taxation, provided that there is reciprocal treatment.
In the full amount of the tax, the following may be applied:
– The amount of the benefits and deductions applied by the Spanish Corporation Tax Law to the Spanish residence companies.
– The amount of the withholdings, and payments on account of the Tax.
3.- Tax period and accrual
The tax period will coincide with the fiscal year declared by the permanent establishment, without exceeding 12 months. When no other has been declared, the tax period will be understood to refer to the calendar year. The tax will accrue on the last day of the tax period.
The communication of the tax period must be formulated at the time the first declaration for this tax must be submitted, understanding that it remains for subsequent periods as long as it is not expressly modified.
The tax period shall be understood to have concluded when the permanent establishment ceases its activity or, in another way, the reversal of the investment is made on its day with respect to the permanent establishment, as well as in the cases in which the permanent establishment is transferred. to another natural person or entity, those in which the central house transfers its residence and when its owner dies.
4.- Formal obligations
The permanent establishments will be obliged to present a declaration, determining and entering the corresponding tax rate, through the simplified model 200 or 201. The return will be presented within 25 calendar days following the six months after the end of the tax period.
The permanent establishments will be obliged to keep separate accounts, referring to the operations they carry out and the patrimonial elements that were attached to them.
They will also be obliged to comply with the remaining accounting, registration or formal obligations required of entities resident in Spanish territory by the corporate tax regulations.
5.- Payments on account
Permanent establishments will be subject to the corporate tax withholding regime for the income they receive, and will be obliged to make installment payments on account of the settlement of this tax, on the same terms as entities subject to Spanish Corporate Tax.
Likewise, they will be obliged to make withholdings and payments on account in the same terms as entities resident in Spanish territory.
b) Incomes obtained without the mediation of a permanent establishment
Taxpayers, companies and/or individuals who operate without a permanent establishment, whether they are natural or legal persons, are taxed in accordance with the IRPF (Spanish Income Tax – Capital Gains Tax) regulations, and do so for each transaction, as established in articles 24 and following of the Consolidated Text of the IRNR Law.
1.- Tax base
a) General rule: In general, the tax base will be made up of its full amount, determined in accordance with the rules of personal income tax.
b) Special rules: In the cases of provision of services, technical assistance, installation or assembly works derived from engineering contracts and, in general, from activities or economic operations carried out in Spain without the mediation of a permanent establishment, the taxable base will be equal to the difference between the full income and the following expenses:
– Salaries and social charges of the personnel employed directly in the development of the activity provided that the income of the applicable tax or the payments on account of the paid work income is justified or guaranteed.
– Provision of materials for their definitive incorporation to the works carried out in Spanish territory.
– Supplies consumed in Spanish territory for the development of activities.
The tax base corresponding to capital gains will be determined by applying, to each capital alteration that occurs, the rules provided for personal income tax, with certain exceptions.
– In the case of non-resident entities, when the capital gain comes from a non-lucrative acquisition (donation for example), that amount will be valuated at the “normal market” value of the item acquired.
– When the earnings come indirectly from assets located in Spanish territory, or from rights related to them, and the entities are considered as “merely holder of assets”, and they are resident in countries or territories with which there is no effective exchange of tax information, those real estates located in Spanish territory will be subject to the payment of the tax.
– In the case of non-resident natural persons, the imputed income of real estate located in Spanish territory will be determined in accordance with the provisions of the Personal Income Tax Law (2% of the cadastral value of urban or rustic real estate with constructions not essential for the exercise of any exploitation, not related to economic activities or generators of real estate capital returns, or 1.1% if the cadastral value has been revised).
– Taxpayers residing in another Member State of the European Union have specific regulations that allow them to apply their own special rules, such as:
*The expenses provided for in the Personal Income Tax Law can be deducted, as if we were talking about residents, as long as they prove that they are directly related to the income obtained in Spain.
*The taxable base corresponding to capital gains will be determined by applying, to each patrimonial alteration that occurs, in general, the rules of the Personal Income Tax Law that would be applied in the event that the taxpayer was so for that Tax.
2.- Tax rate
|Residents EU, Iceland and Norway||Rest of countries|
* Work income received by non-resident individuals in Spanish territory by virtue of a fixed-term contract for seasonal workers, in accordance with the provisions of labor regulations: 2%.
* Dividends and other income derived from the participation in equity of an entity, and Interest and other income obtained from the transfer of own capital to third parties: 19 %
Only the following will be deducted from the tax:
The amounts corresponding to the deductions for donations in the terms provided in article 68.3 of the Consolidated Text of the Personal Income Tax Law.
The withholdings and payments on account that have been practiced on the taxpayer’s income.
The tax will accrue:
– In the case of returns, when they are due or on the date of collection if this is earlier.
– In the case of capital gains, when the property alteration takes place.
– In the case of imputed income corresponding to urban real estate, on December 31 of each year.
– In the remaining cases, when the corresponding income is due.
– In the event of the taxpayer’s death, all income pending imputation shall be deemed payable on the date of death.
5.- Formal obligations
Taxpayers who obtain income in Spanish territory without the mediation of a permanent establishment will be obliged to present a declaration, determining and entering the corresponding tax debt for this tax within a period of one month from the accrual date. In the case of imputed income corresponding to urban real estate for own use, the return will be presented from January 1 to June 30 following the accrual date.
The joint and several liable parties may also make the declaration and deposit of the debt. Taxpayers for this tax will not be required to present the declaration corresponding to the income with respect to which withholding or income on account had been made, nor with respect to those subject to withholding or income on account but exempt.
Taxpayers who obtain income from economic activities or exploitations carried out in Spain will be obliged to keep records of income and expenses.
Likewise, they must keep, numbered in order of dates, the invoices issued and the invoices or supporting documents received.
They are obliged to make withholdings and payments on account with respect to the work income they satisfy, as well as other income subject to withholding that constitutes.