We summarize below these measures, stressing those aspects which are
most significant and potentially relevant in practice[1].
2. CIT MEASURES
2.1 Permanent measures
RD-Law 12/2012 establishes a series of permanent measures affecting
CIT that will apply to all tax periods starting from 1 January 2012.
2.1.1 Non-deductibility of interest deriving from intra-group
indebtedness financing the acquisition of shares from other group
entities
As a general rule, financial expenses deriving from intra-group
indebtedness will not be deductible for CIT taxpayers when the relevant
debts have been incurred in order to: (i) acquire an interest in the
share capital or equity of any type of entity from another group
company, or (ii) increase the share capital or equity of any other group
companies; unless the taxpayer evidences that there are sound business
reasons to carry out these transactions.
RD-Law 12/2012 does not define “sound business reasons” for these
purposes, but it states in its preamble that a group restructuring
that is a direct consequence of an acquisition from third parties
(which could include certain debt push down transactions), or
situations in which the acquired companies are actually managed from
Spain; can be deemed reasonable from an economic perspective.
Probably, the application of this rule will be controversial in
practice and it will certainly make it necessary to review the business
rationale of a wide number of transactions.
2.1.2 General restriction on the deduction of financing
expenses
RD-Law 12/2012 has replaced the thin capitalisation rule (which scope
was substantially reduced as it did not apply to debts with residents in
the EU) with a general restriction on the deduction of financing
expenses, by which net financing expenses exceeding 30% of the operating
profit of a given tax year will not be deductible for CIT purposes. This
general restriction, according to the preamble to the law, in
practice, becomes a rule on the specific temporary allocation of
financing expenses, which can then be deducted in future tax periods in
a similar way to the offsetting of tax losses. However, net
financing expenses not exceeding EUR 1 million will be tax deductible in
any case.
In this regard, it must be taken into account that:
- Net financing expenses are defined as the financing
expenses in excess of the income derived from financing to third parties
in a given tax year, excluding non-deductible financing expenses that
derive from intra-group financing granted for the acquisition of shares
from other entities of the group. This exclusion may generate some
practical issues, as it makes the deductible financing expenses general
rule calculation dependent on the previous assessment of the business
rationale of any intra-group financial transactions for the acquisition
of participations in other companies. Investments in Spain during the
last 10 years have usually been leveraged, and intra-group debt has
frequently played a key role in the cash flow models prepared for
planning these investments. These models, which will be affected by the
unexpected general restriction on interest deductibility, may be
additionally affected by the practical uncertainty on how intra-group
financing should be treated for the relevant calculations.
- Operating profit is defined as the accounting
operating profit for the relevant tax period, (i) minus the
amortization of fixed assets, subsidies for non-financial fixed assets
and others, impairment and gains or losses from the transfer of fixed
assets; (ii) plus dividends (from 5% or higher participations or
participations acquired for more than EUR 6 million, except when the
acquisition has been financed by means of non-deductible intra-group
debts). This is basically EBITDA subject to certain adjustments. Again,
the calculations may be affected by the assessment of the business
rationale of the above-referred intra-group financing transactions.
- Net financing expenses exceeding 30% of the operating
profit of a given tax year will not be deductible in such a year, but
they may be carried forward and deducted in the following 18 years,
always subject to the same general restriction. On the other hand, if
the net financing expenses in a given year fall below the 30% limit for
that tax period, the “remainder” may be added to the 30% limit of one of
the following five years, so that the total limit is increased for such
a year.
- Under the CIT group consolidation regime, the 30% limit
applies to the group as a sole taxpayer. RD-Law 12/2012 sets forth rules
for net financing expenses pending to be deducted that are analogous to
those applicable for carried forward losses when a company is included
or leaves a consolidation group, or when the group is terminated.
Special rules are also foreseen for economic interest groupings.
Obviously, these restrictions will have to be carefully analysed when
planning the acquisition of Spanish businesses, and in particular, when
defining the debt/equity mix for these transactions (this may be
particularly important in private equity transactions). Likewise,
transactions that have already been carried out will have to be
re-examined in order to analyze how to minimize the impact of these
restrictions.
On the other hand, it is important to highlight that the general 30%
restriction on the deduction of financing expenses does not apply to:
a) Entities that do not belong to a group of companies (as
defined in article 42 of the Commercial Code), unless the financing
expenses arising from (i) debts with persons or entities that have at
least a 20% direct or indirect participation in the relevant entity, or
(ii) debts with entities in which the relevant entity has a direct or
indirect participation of at least 20%; exceed 10% of the net financing
expenses;
b) Financial entities. Nevertheless, when financial entities are
taxed under the group consolidation regime together with non-financial
entities, the restriction on the deduction of financing expenses will be
calculated exclusively with regard to the operating profits and net
financing expenses of the latter.
2.1.3 Relaxation of requirements to apply the tax exemption on
capital gains arising from the sale of shares in non-resident companies
Until now, in order to apply the exemption provided by article 21.2
of the CIT Law on capital gains arising from the sale of shares in
companies not resident in Spain, the following requirements had to be
met throughout all the periods in which shares were held in the
non-resident company:
- the non-resident company had to be subject to an identical
or analogous tax to Spanish CIT (this requirement is deemed to be met
whenever there is a double taxation treaty with an exchange of
information clause between Spain and the country of residence of the
non-resident entity) and could not be resident in a tax haven; and
- the non-resident company had to obtain over 85% of its
income in every tax period from business activities conducted abroad,
according to certain conditions.
RD-Law 12/2012 relaxes these requirements and allows the exemption to
be applied proportionally in situations where one of the requirements
(or neither of them) has been complied with, during one or some of the
periods in which the taxpayer has held a share in the non-resident
company. In particular:
- The exemption will apply to the portion of the gain which
corresponds to non-distributed profits generated by the participated
company during the holding periods in which the two requirements were
met.
- The exemption will also apply to the portion of the gain
which does not correspond to non-distributed profits of the participated
company (i.e., goodwill and embedded gains), to the extent that it is
allocable to holding periods in which both requirements were met
(according to a linear distribution rule).
- The remaining gain will not be exempt from taxation, but
any tax paid by the taxpayer in the country where the capital gain was
triggered (article 31 of the CIT Law) may be proportionally deducted
from its CIT liability on such non-exempt income.
In addition, RD-Law 12/2012 modifies some of the restrictions for the
application of this exemption, in order to adjust them to the above
referred new calculation method.
2.1.4 Abolishment of the free amortisation benefit
RD-Law 12/2012 has done away with the free amortisation benefit
formerly applicable to new tangible fixed assets and investments in real
estate to be operated in the company’s business activity. According to
the 11th Additional Provision of the CIT Law, this tax benefit was
foreseen to apply from 2011 to 2015.
Additionally, certain restrictions have been established for amounts
pending to be applied under the free amortization corresponding to
investments carried out before RD-Law 12/2012 entered into force, by
taxpayers which are not small-sized companies[2].
2.1.5 Extension of terms to apply pending tax credits
The general term to apply tax credits to foster certain activities or
investments that could not be applied in the tax period in which they
were generated has been increased from 10 to 15 years. In the case of
the research and development and technological innovation and IT and
telecommunications tax credits (articles 35 and 36 of the CIT Law), this
term has been increased from 15 to 18 years. These new terms apply to
any of these tax credits generated during the tax periods started after
1 January 2012, and also to those generated before which are pending to
be applied.
According to the preamble to the law, the extension of these terms
aims to offset the negative effect that may arise from the temporary
restriction on the application of these tax credits (the temporary
restrictions on the application of these tax credits is explained
further in section 2.2.2., but mainly consists in limiting the
deductions that can be applied to 25% of the gross tax payable during
tax periods starting in 2012 and 2013) by allowing the deductions that
cannot be applied due to temporary restrictions to be applied in future
tax periods.
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2.2 Temporary measures applicable during tax periods
starting in 2012 and 2013
RD-Law 12/2012 establishes a series of temporary measures which,
according to its preamble, are aimed at allowing the State to collect
taxes earlier without increasing the tax burden for companies.
Nevertheless, these measures may entail a financial cost for
taxpayers and may also result in higher tax expenses, especially if the
future tax bases or liabilities of the relevant taxpayer are
insufficient to absorb the deferred deductions.
2.2.1 1% limit on annual goodwill deduction
The tax deduction of goodwill derived from the acquisition of a
business (generally by means of an asset deal, according to article 12.6
of the CIT Law) or from a merger or spin off (article 89.3 of the CIT
Law) is reduced from 5% to 1%.
Royal Decree-Law 9/2011 already limited the deductible financial
goodwill of non-resident companies (i.e., the implicit goodwill in the
acquisition value of a stake in a company) to an annual maximum of 1%
for tax periods starting in 2011, 2012 and 2013. For tax periods
starting in 2012 and 2013, this limit now applies to all types of
goodwill.
Although in the long term this restriction on the deduction of the
goodwill derived from an asset deal or a merger or spin off should not
have an impact on the relevant company’s profits other than the
financial cost that paying the tax in advance implies, it could very
well have an impact on the company’s treasury needs by altering its cash
flow forecasts. This, together with the permanent measures restricting
the deductibility of financing expenses mentioned previously, may
significantly affect the cash flow models of many of the acquisitions
and investments carried out in Spain over the last years, which will
have to be carefully analysed on a case by case basis.
2.2.2 Restrictions on the application of certain tax credits,
including tax credit for reinvestment
For tax periods starting in 2012 and 2013, RD-Law 12/2012 reduces the
maximum amount against which the tax credits foreseen in Chapter IV of
Title VI of the CIT Law (tax credits to encourage the performance of
certain activities) can be applied from 35% to 25% of the gross tax
payable (minus allowances and international double taxation tax credit).
This limit is reduced from 60% to 50% when the tax credit for research
and development and technological innovation activities (article 35 of
the CIT Law) corresponding to expenses incurred in the current tax year
exceeds 10% of the gross tax payable (minus allowances and international
double taxation tax credit).
This limitation will also apply to the tax credit for reinvestment
(article 42 of the CIT Law) in 2012 and 2013. Therefore, the tax credit
for reinvestment will have to be included, together with the rest of the
tax credits for fostering certain investments and activities, in order
to calculate this limitation.
The negative effect of the temporary restriction on the application
of these tax credits is partially counterbalanced by the extension of
the terms to apply pending tax deductions (see section 2.1.5).
2.2.3 Minimum payments in advance on account of CIT for
taxpayers whose turnover exceeds EUR 20 million
RD-Law 12/2012 establishes minimum payments in advance on account of
CIT for taxpayers whose turnover in the 12 months prior to the start of
tax periods beginning in 2012 or 2013 is EUR 20 million or above.
In particular, according to this rule, payments in advance on account
of CIT which are calculated pursuant to article 45.3 of the CIT Law
(i.e., on the basis of the taxable income for the first three, nine or
eleven months of each calendar year) cannot be less than 8% (or 4% for
payments to be effected before 20 April 2012) of the positive result
of the profit and loss account for the first three, nine or eleven
months of each calendar year, reduced by carried forward losses
pending to offset (but taking into account that offsetting of these
losses will be subject to the following limits: (i) companies with a
turnover of between EUR 20 million and EUR 60 million may only offset up
to 75% of their taxable income; and (ii) companies which turnover
exceeds EUR 60 million may only offset up to 50% of their taxable
income).
No reference is made to how the minimum payments in advance on
account of CIT are to be calculated when the tax and calendar years do
not coincide. In the absence of a provision in this regard, it would
seem reasonable to apply the criteria set out in article 45.3 of the CIT
Law according to which in these cases the payments in advance are to be
calculated on the basis of the taxable income corresponding to the days
elapsed from the commencement of the tax period until the day prior to
the start of each of the periods when tax payment is due.
In any case, this percentage is halved to 4% (2% for payments due on
20 April 2012) if at least 85% of the income in the first three, nine or
eleven months of each calendar year derives from subsidiaries or
permanent establishments and takes the form of: (i) dividends and
capital gains from the sale of shares in non-resident companies that are
entitled to apply the exemption set out in article 21 of the CIT Law;
(ii) income obtained through a permanent establishment entitled to apply
the exemption set out in article 22 of the CIT Law; and (iii) dividends
or a share in the profits of companies resident in Spain to which the
100% tax credit set out in article 30.2 of the CIT Law applies.
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3. special tax on dividends aNd INCOME derivING from
the sale of shares in non-resident COMPANIES
RD-Law 12/2012 introduces a new special tax that can be applied at
the discretion of taxpayers as an alternative to CIT. It taxes dividends
and capital gains derived from the sale of shares in non-resident
companies and that accrue in 2012, provided that a stake of at least 5%
is held directly or indirectly in the non-resident subsidiary (for at
least one year) and that over 85% of the subsidiary’s income derives
from an active business carried out abroad, as set out in article 21 of
the CIT Law. For the purposes of this special tax, fulfilment with the
last referred requirement may be determined on the basis of the total
income obtained by the participated company during the whole holding
period.
In other words, this tax may apply as regards to dividends and
capital gains from shares that cannot be exempt from CIT under article
21 of the CIT Law, as they do not comply with the requirement set forth
by article 21 of the CIT Law by which the participated company must be
subject to a tax that is identical or analogous to Spanish CIT and must
not reside in a tax haven; but that comply with the rest of requirements
set forth by this article.
As a tax alternative to CIT, this tax cannot be considered as a
deductible expense for CIT purposes, and the dividends or capital gains
which are taxed under this special tax will not be included in the CIT
taxable income (and will not generate any CIT tax credit for the
avoidance of international double taxation under articles 31 and 32 of
the CIT Law).
This special tax will apply at a rate of 8%, although a rate of 30%
will apply to any capital gains in the portion that corresponds to a
previous impairment in the value of the transferred shares which has
been deemed deductible for CIT purposes.
On the other hand, this special tax accrues on dividends on the date
a decision is taken to distribute them and on capital gains on the date
the corresponding transfer takes place. This tax must be paid within 25
calendar days as from the date of accrual, for which purpose a specific
tax return will be approved.
In our view, it would be generally beneficial to opt for this tax
when the application of tax credits for the avoidance of international
double taxation set out in articles 31 and 32 of the CIT Law imply a
greater burden (i.e., whenever the overall tax burden in a foreign
country that is potentially deductible in Spain is less than 22%).
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4. procedure for the extraordinary regularisation of
undeclared assets and rights
RD-Law 12/2012 has established an extraordinary procedure for the
regularisation of undeclared assets and rights until 30 November 2012
that will allow CIT, Personal Income Tax, and Non-resident Income Tax
payers to regularise their situation with regard to undeclared assets
and rights.
To this end, the taxpayer must:
- Have held the undeclared assets before the conclusion of
the last tax period which payment period ended before 31 March 2012
(i.e., with regard to Personal Income Tax, assets held as at 31 December
2010).
- File a specific tax return, to be made available by the
Ministry of Finance and Public Administration, declaring all the
necessary information to identify the previously undeclared assets and
rights.
- Pay 10% of the value or purchase price of the undeclared
assets or rights subject to regularisation.
If this procedure is followed, the taxpayer will not have to pay tax
penalties, interest or surcharges. However, this regularization
procedure will not apply if the taxpayer files the tax return and pays
the tax owed after the Spanish Tax Authorities have initiated a
verification or audit procedure concerning the tax debt that is being
regularised.
The General Tax Law has also been amended to include an exemption
from criminal liability when the Spanish Tax Authorities consider that a
taxpayer has declared and paid its tax debts in full prior to the
commencement of verification or audit procedures. This would also apply
to tax debts that have prescribed under administrative law (the
prescription period for criminal offences is five years and four years
for administrative offences). The General Tax Law also establishes that
payments that imply an exemption from criminal liability will never be
considered undue payments, even if they are time-barred under
administrative law.
Although there are some uncertainties as to the interpretation of the
exemption from criminal liability set out by the General Tax Law, we
understand that the exemption applies both to taxpayers that follow the
extraordinary regularisation procedure set out in RD-Law 12/2012 and to
those that regularise their situation following the ordinary procedure.
As with almost all special regulations for exceptional circumstances,
this procedure raises some questions from a technical point of view. Is
it a new tax that exonerates taxpayers from the obligation to pay other
taxes, or is it merely a reduced tax rate for certain taxes and
situations declared in a specific tax return? Its application and
effects are also ambiguous; the procedure refers to a “special tax
return” that identifies “assets and rights” that are considered
“declared income” for the purposes of taxing capital gains that are not
taxed by Personal Income Tax, but while the procedure seems to apply to
Non-resident Income Tax it does not apply to Wealth Tax. Another aspect
is how it fits in with criminal offences against the Public Treasury.
The new wording of article 180.2 of the General Tax Law grants the
Spanish Tax Authorities the power to decide whether or not to exonerate
taxpayers from criminal liability when they voluntarily regularise their
tax situation.
A more in-depth analysis would be necessary to determine the form the
“special tax return” should take to ensure it achieves the aims sought
by the Spanish Government.
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5. amendment of the Local Tax on the Increase IN the
Value of Urban Land
Before RD-Law 12/2012, town councils were obliged to reduce cadastral
values when determining the taxable base of the local Tax on the
Increase in the Value of Urban Land (Impuesto sobre el Incremento de
Valor de los Terrenos de Naturaleza Urbana, or “IIVTNU”, its
acronym in Spanish) during the five years following the adjustment of
the cadastral values of urban real estate in a municipality as a
consequence of a general collective valuation procedure. This reduction
had to be between 40% and 60% of the new cadastral value and the Local
Tax Authorities Law established a compulsory reduction of 60% in
municipalities where the town council had not approved a reduction.
Now, every town council has the authority to decide whether they wish
to reduce the taxable base of the IIVTNU when the cadastral values in
the municipality are increased. The town council may also set the
percentage reduction and term during which it will apply.
A temporary measure has also been passed that will apply until 31
December 2012 and according to which the extraordinary 60% reduction
established by law will continue to apply in those municipalities where
the town council has not approved a specific reduction. However, if the
town councils do not approve the reduction for subsequent tax years, the
60% reduction will cease to apply as from 1 January 2013.
[1] RD-Law 12/2012 also introduced certain modifications regarding
the excise duties levied on tobacco products, which are not addressed in
this document.
[2] A similar measure has been introduced in the context of personal
income tax.
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