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1. INTRODUCtion
Royal Decree-Law
12/2012, of 30 March, introduced various tax and administrative measures
to reduce the Spanish public deficit (“RDL 12/2012”).
Among these measures, RDL 12/2012 implemented a general restriction on
the deduction of financing expenses in the Spanish Corporate Income Tax
(“CIT”), replacing the former thin capitalisation rule
(which scope was substantially reduced as it did not apply to debts with
residents in the EU).
In a nutshell,
this general restriction entails that financing expenses incurred by CIT
taxpayers exceeding 30% of their operating profit of a given tax year
will not be deductible for CIT purposes; however, net financing expenses
not exceeding EUR 1 million will be deductible for CIT purposes in any
case.
This general
restriction was amended by Royal Decree-Law 20/2012, of 13 July,
establishing various measures to strengthen the Spanish financial
stability and competiveness (“RDL 20/2012”), and has
been interpreted by the Spanish tax authorities by means of a Resolution
issued by the General Directorate of Taxes (“GDT”) on
16 July 2012.
We summarize
below the main aspects of this new rule, as amended by the RDL 20/2012
and taking into account the guidelines provided in the GDT’s Resolution.
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2. AMOUNT SUBJECT TO THE RESTRICTION: NET FINANCING EXPENSES
The general CIT
deductibility restriction applies on the amount of net financing
expenses of a taxpayer in a given tax period.
For these
purposes, “net financing expenses” are defined as the difference between
the financing expenses (generally, interest expenses) and the income
derived from financing to third parties (generally, interest income) in
a given tax year, excluding non-deductible financing expenses. In this
regard, financing expenses that derive from intra-group financing
granted for the acquisition of shares from other entities of the group
are not CIT deductible (and therefore, they must not be taken into
account for calculating the “net financing expenses”) in the terms laid
down in Article 14.1.h of the consolidated text of the Spanish CIT Law
(“CIT Law”), as approved by the Royal Legislative
Decree 4/2004, of 5 March.
Further to the
“net financing expenses” definition, the administrative guidelines
provided in the GDT’s Resolution are as follows:
1.
Financing expenses are those expenses related to the business
indebtedness, which are registered as such in the profit and losses
account (“P/L”) of the relevant CIT taxpayer and, in
particular, those included in Section 13th of the P/L model
of the Spanish GAAP regulations, as approved by the Royal Decree
1514/2007, of 16 November (“Spanish GAAP”):
i.e., P/L accounts 661, 662, 664 and 665. As a result, interest
expenses accrued from bonds or debentures, financing expenses,
dividends from shares or quotas registered as financial liabilities,
or interest expenses derived from the discount of negotiable
instruments or from factoring are deemed as “financing expenses” for
the purposes of this general restriction.
On the other
hand, the following expenses would not qualify as financing expenses
for these purposes:
(i) interest
registered as part of the acquisition or production cost of an asset;
(ii) those
expenses derived from the update of provisions or impairments; or
(iii) any
financing expenses that are not CIT deductible according to Law.
2.
Income derived from financing to third parties includes items
of income referred in Section 12th of the P/L model of the
Spanish GAAP: i.e., P/L accounts 761 y 762 (financial income from
credits, debentures or bonds).
3. Expenses or
income corresponding to financing with related parties will be
included in the “net financing expenses” after being adjusted by CIT
transfer pricing rules.
In addition, the
GDT’s Resolution considers that there are some items of income or
expenses which must qualify as financial income or expenses in order to
determine the “net financing expenses” figure even though they are not
considered as “financial” for accounting purposes, namely:
a. Those
expenses derived from the impairment of credits, in the portion
corresponding to interest income accrued and unpaid (we understand
that this is to the extent that they meet the conditions set out in
Article 12.2 of the CIT Law to be deemed as CIT deductible).
b. Foreign
currency exchange differences registered in the P/L of the relevant
tax year which derive from financings subject to the general
restriction of Article 20 of the CIT Law.
c. Income and
expenses derived from financial collateral connected to debts incurred
by the relevant CIT taxpayer.
d. Positive
and negative results resulting from Spanish silent partnerships (cuentas
en participación), in the portion corresponding to the silent
partners (partícipes no gestores).
In addition, the
GDT’s Resolution clarifies the treatment of the interest income which is
included in the turnover of certain entities -e.g., holding companies
(as regards the interest income derived from financings granted to their
subsidiaries) or infrastructure concession operators (as regards the
financial income registered from the services concession remuneration
agreements registered as credits)-. In these cases, the GDT’s Resolution
considers that the financial nature of the income should prevail and,
hence, that they should be taken into account for the purposes of
calculating the net financing expenses figure of the relevant CIT
taxpayer (and, consequently, for the same reasons these items of income
or expenses are not to be included in the EBITDA figure).
It is worth
mentioning that, as a general rule, it will be preferable for a taxpayer
that a given item of income qualifies as financing income to be included
in the “net financing expenses” figure (so that it sets off financial
expenses in the same amount); as otherwise (i.e., it being included in
the EBITDA instead of the “net financing expenses”) it could only allow
deductibility of financial expenses for 30% of its amount.
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3. CALCULATION OF THE DEDUCTIBILITY LIMIT BASIS: OPERATING PROFIT OF
THE FISCAL YEAR OR EBITDA
The
operating profit of the fiscal year (hereinafter “EBITDA”)
is defined as:
- the
accounting operating profit for the relevant fiscal year,
minus
- the
amortization of fixed assets,
- the subsidies
connected to non-financial fixed assets and others, and
- the
depreciation for impairment of fixed assets as well as the gains or
losses derived from the transfer of fixed assets,
plus
dividends (and,
in general, any income for distribution of profits) derived from shares
or participations in entities which (i) represent at least 5% of their
share capital or, alternatively, (ii) have an acquisition cost exceeding
EUR 6 million. However, dividends from stakes which have been acquired
from other companies of the group with intra-group financing generating
non-deductible expenses according to article 14.1.h) of the CIT Law are
excluded for these purposes.
Therefore, the
Law basically refers to the accounting EBITDA subject to certain
adjustments.
In this regard,
the GDT’s Resolution makes the following considerations:
a. Dividends (and,
in general, any income for distribution of profits) should only be
added to the accounting operating profit (as an adjustment under the
above referred rule) to the extent that they are not previously
included in the net turnover of the relevant CIT taxpayer. According
to the GDT, the operating profit of holding entities already includes
any dividends from their subsidiaries and therefore they must not be
added as an adjustment, as otherwise they would be computed twice.
Following this reasoning, it would seem possible to defend that
holding companies are not affected by the restriction applicable to
dividends derived from shares acquired with non-deductible intra-group
financing (the Law foresees the addition of dividends as an adjustment
to the operating profit subject to certain conditions and to the
extent that the relevant shares generating the dividends were not
acquired from other companies of the group and financed with intra-group
debt which generates non-deductible interest according to Article
14.1.h) of the CIT Law).
b. The GDT
considers that the exclusion of dividends from the operating profits
figure of the fiscal year of the corresponding CIT taxpayer, when the
relevant stake of the entity distributing the dividend was acquired
from other company of the group and was financed with intra-group debt
which generates non-deductible expenses according to Article 14.1.h)
of the CIT Law, only applies to the extent that the intra-group debt
financing the acquisition has not been not fully repaid.
On this basis,
we understand that a partial repayment of the debt should result in a
partial application of this restriction, although the GDT does not
clarify this matter.
In any case,
in our view the administrative interpretation evidences the
inconsistency of the Law when excluding these dividends, as this
exclusion results in a double penalty for the acquisition of shares
from other companies within the group which has been financed by means
of intra-group indebtedness (on the one hand, the interest expenses
generated by the intra-group debt would not be deductible from the CIT
taxable income pursuant to Article 14.1.h) of the CIT Law and, on the
other hand, the dividends generated by the relevant shares would not
be computed for determining the EBITDA, which affects the
deductibility of other interest expenses). If the rationale behind the
double penalization is avoiding CIT taxpayers artificially increasing
their EBITDA by acquiring shares in companies from other entities of
their group which may generate future dividends, it does not seem
consistent that the exclusion of dividends from the EBITDA only
applies when the acquisition of the relevant shares has been financed
with intra-group indebtedness, or that the exclusion is lifted once
the intra-group debt is repaid.
In any event,
it is worthwhile to point out that the restriction to the CIT
deductibility of interest expenses under Article 14.1.h) of the CIT
Law is not applicable when the CIT taxpayer proves the existence of
valid business reasons to carry out the intra-group acquisition of
shares financed by means of intra-group indebtedness. In our view,
this will certainly generate a good number of controversial cases in
practice.
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4. MINIMUM AMOUNT OF FINANCING EXPENSES WHICH ARE DEDUCTIBLE FROM
THE CIT TAXABLE INCOME
The CIT Law sets
out that net financing expenses not exceeding EUR 1 million in a
relevant CIT year will be CIT deductible in any case (i.e., even if they
exceed 30% of EBITDA). For these purposes, the GDT’s Resolution
considers that, if the CIT period of the taxpayer is shorter than one
year, the EUR 1 million figure must be proportionally prorated.
Therefore, the
limit of deductibility of net financing expenses will be the higher
amount between (i) 30% of the EBITDA of the relevant tax year and (ii)
EUR 1 million (prorated if the tax period is shorter than one year), as
confirmed by the GDT’s Resolution: for instance, if the net financing
expenses amount to EUR 1,100,000 and 30% of EBITDA of the relevant
fiscal year amounts to EUR 600,000, then the net financing expenses
deductible from the CIT taxable income would be limited to EUR 1 million.
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5. TEMPORARY aspects
The CIT Law
intends to avoid that exceptional situations where in a given tax year
the net financing expenses are higher than usually may be penalized; and
therefore, to some extent it takes a multi-year perspective for the
application of the limit to the deductibility of financing expenses, on
the basis of two rules:
a. the amount
of net financing expenses which are not deductible in a given tax year
because they exceed the maximum deductible limit for such tax year may
be carried forward and deducted in the following 18 years (subject to
the limit applicable in each of these years).
b. if the net
financing expenses in a given tax year are below the CIT deductibility
limit for that tax year, the amount of the limit which has not been
“consumed” by the net financing expenses of that tax year (i.e., the
amount of the limit which exceeds the relevant net financing expenses)
will be available to offset net financing expenses of the following
five years (by increasing the limit applicable in such years).
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5.1. Carry forward of non-deductible net financing expenses
As advanced, the
amount of net financing expenses which are not deductible in a given tax
year because they exceed the maximum deductible limit for such tax year
may be carried forward and deducted in the following 18 years (subject
to the limit applicable in each of these years).
Further to this
rule, the GDT’s Resolution considers that the net financing expenses
generated but not deducted in a given tax year can only be deducted in
the following 18 years after deduction of the net financing expenses
applicable in each of such following years (i.e., deductibility of net
financing expenses generated in previous tax years would only be
feasible in the amount which does not exceed the amount of the limit to
deductibility which has not been consumed by net financing expenses
generated in the current tax year, if any).
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5.2. Carry forward of the unused 30% EBITDA
The CIT Law lays
down that if the net financing expenses are lower than the deductibility
limit in a relevant CIT year, the “remainder” (i.e., the portion of the
deductibility limit amount which exceeds the relevant net financing
expenses) can be used to deduct financing expenses in the following five
years (the deductibility limit applicable in such years will be
increased in the amount of such “remainder”).
Given that the
limit of deductibility of net financing expenses is the higher amount
between (i) 30% of the EBITDA of a tax year or (ii) EUR 1 million; it
could be construed that the “remainder” limit to be carried forward
should be determined by the excess of such higher amount over the net
financing expenses deducted in the relevant tax year.
However, this is
not the interpretation held by the GDT. According to the GDT’s
Resolution, the EUR 1 million minimum deductibility threshold must be
disregarded for these purposes; and only the amount of the 30% EBITDA
which exceeds the net financing expenses deducted in the relevant tax
year can be carried forward.
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6. SPECIAL rules APPLICABLE TO ENTITIES SUBJECT TO THE SPECIAL CIT
GROUP REGIME
6.1. Application of the deductibility limit under the CIT group
regime
Article 20.4 of
the CIT Law sets forth that, when a group of entities are taxed as a CIT
group, the CIT deductibility limit applies to the CIT group as a sole
taxpayer. This means that, in principle, the calculation of both the net
financing expenses and the EUR 1 million should be determined and
applied to the CIT group as a whole.
Under the CIT
group regime, the CIT base of the group is generally equal to the
aggregated individual CIT bases of the entities within the CIT group,
plus or minus the eliminations and incorporations of intra-group
transactions, and after offsetting CIT losses corresponding to previous
years. Therefore, only when the individual CIT bases of the entities
within the CIT group are aggregated, the CIT group is treated as a
single CIT taxpayer.
However, Article
20.4 of the CIT Law seems to establish an exception to this general rule
when laying down that the limit for deductibility of net financing
expenses must be determined at the group level. According to the GDT’s
Resolution, this means that when determining the individual CIT base,
each company within the group will have to consider the group
circumstances, taking into account both the group net financing expenses
and the group EBITDA (adjusted after elimination or recapture of intra-group
transactions).
Under this
scheme, after determining at the level of the group the amount of
financing expenses which exceed the deductibility limit of the group,
these non-deductible expenses are to be distributed among the companies
within the group which, on a stand-alone basis, have net financing
expenses exceeding their respective deductibility limit (determined on
an individual basis). This distribution of the non-deductible expenses
is to be carried out on a proportional basis, taking into account the
excess of each company’s individual net financing expenses over its
individual deductibility limit. In this regard, both the net financing
expenses and the operative profits of each entity will be those which
they generate for the group, taking into account the eliminations and
recapture of intra-group transactions.
In addition,
pursuant this GDT’s interpretation, in those cases where the amount of
non-deductible net financing expenses of the CIT group is higher that
the aggregated figure of the net financing expenses exceeding 30% of the
operative profits of all the entities within the group, the excess
should be distributed among all the entities within the CIT group in
proportion to their respective individual net financing expenses, after
substracting those already regarded as non-deductible for CIT purposes.
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6.2. Inclusion or exclusion of entities within the CIT group
Outstanding
“carried-forward” net financing expenses generated in tax years previous
to the application of the CIT group to a given entity are subject to a
double limit, analogous to that applicable to carried forward losses:
(i) the CIT group limit (i.e., the group net financing expenses are only
deductible up to the higher amount between 30% of the group’s EBITDA or
EUR 1 million); and (ii) the individual limit of the relevant entity
(i.e., the individual net financing expenses are only deductible up to
the higher amount between 30% of the relevant company’s EBITDA or EUR 1
million).
However, Article
20.4 of the CIT Law does not refer to the case where there are
outstanding “carried forward” 30% EBITDA (instead of “carried-forward”
net financing expenses) generated in tax years previous to the
application of the CIT group regime. In this regard, the GDT has
considered that the outstanding carried forward 30% EBITDA will only be
available to allow deductibility of net financing expenses of the
relevant company on an individual basis.
In addition, if
an entity within a CIT group leaves the group, or if the CIT group is
terminated, the outstanding carried forward net financing expenses
generated in previous tax years within the group will be attributed to
each company “leaving” the CIT group under the same rules applicable for
carried forward losses. We understand that the same rule should apply to
outstanding carried forward 30% EBITDA.
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7. EXCLUSIONs to this general restriction
According to
article 20.4 of the CIT Law, as amended by RDL 20/2012, the
deductibility limit does not apply to the following entities:
a. Credit
and insurance entities. However, in those cases where a CIT group
includes both credit and non-credit entities, the deductibility limit
must be calculated taking into account the EBITDA and net financing
expenses of the non-credit entities. The GDT’s Resolution includes
certain considerations on the implications in these situations where
credit entities “cohabite” with non-credit entities in a CIT group (we
understand that the same considerations should apply mutatis
mutandis to CIT groups where insurance entities “cohabite” with
non-insurance entities).
b. Those
entities which are liquidated or winded-up, unless such event takes
place as a result of a restructuring transaction sheltered under the
tax neutral regime set out in Chapter VIII, Title VII, of the CIT Law,
or if it is carried out within a CIT group and the liquidated/winded-up
entity had outstanding carried-forward net financing expenses
generated in tax years previous to it being taxed under the CIT group
regime.
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