The general regulations for the determination of income for corporate tax purposes state that accounting rules must be followed, unless tax legislation provides otherwise. In order to maintain this consistency, the IS/EP IRNR statements include specific sections where the figures of the company's accounting/commercial balance sheet and income statement must be reflected.

In Spain, tax authorities have the power to adjust accounting results only for tax purposes, if they determine that a company's accounting results have not been calculated in accordance with the Spanish Generally Accepted Accounting Principles.

Stock Valuation

Stocks are valued at the purchase price or at the cost of production, using average valuation and first-in, first-out (FIFO) methods. Replenishment and basic stock valuation methods can only be applied in exceptional situations. Since there are no specific tax rules for determining the tax base in this context, accounting rules apply to calculate the valuation and provisions for obsolescence of inventories.

Capital Gains and Losses

Capital gains are charged in the fiscal year in which they are generated, considered ordinary income and are taxed at the general corporate tax rate, which is 25%. In the case of transactions whose payment is deferred or fractioned, income is recognized proportionately as payments are made, unless the taxpayer chooses to apply the accrual criterion.

As a general rule, with a few exceptions, capital gains derived from the transfer of shares in companies resident in Spain, in which at least 5% of participation has been held for at least one year, are 95% exempt from taxation (the remaining 5% are taxed at the corresponding tax rate). This exemption also considers the time during which the participation is maintained in another company in the group.

Capital losses resulting from the transfer of shares are only tax-deductible if they correspond to shares of less than 5%. In addition, in the case of shares in the capital or equity of non-resident companies, the investee entity must have been subject to, and not exempt, from a foreign tax similar to IS at a nominal rate of at least 10%, or reside in a country with which Spain has a Double Taxation Treaty that includes an information exchange clause.

The negative income generated in the extinction of an investee company is tax deductible, unless the extinction occurs as a result of a restructuring operation. In such cases, negative income will be adjusted by the amount of dividends received during the ten years prior to the date of extinction, provided that these dividends have not reduced the purchase value and have allowed the application of an exemption or deduction regime to avoid double taxation.

Negative tax bases caused by the transfer of assets to another company in the same group are not deductible at the time of transfer. Your tax deductibility is postponed until the assets are written off from the acquirer's balance sheet when they are transferred out of the group or when the transferor or the acquirer ceases to be part of the group. However, for amortizable assets, the amount not deducted must be included based on the amortization made by the acquiring company.

Dividend Income

Dividends received from companies resident in Spain, in which a minimum participation of 5% has been maintained for at least one year (including shares in other companies in the group), can benefit from a 95% exemption. This implies that, if the general tax rate of 25% is applied, dividends will be taxed at a reduced rate of 1.25%. On the contrary, dividends received from companies resident in Spain in which the participation is less than 5% are fully taxable for the recipient.

There are special rules applicable in the following cases:

Dividends Received from Companies with Significant Dividend or Capital Gains Income: Dividends received from companies that obtain dividends or capital gains derived from the transfer of shares in other companies, when these revenues represent more than 70% of the company's gross income.

Capital Gains Generated by Transfers of Shares in Companies with Significant Income: Capital gains generated by the transfer of shares in companies that obtain dividends or capital gains from the transfer of shares, when such revenues exceed 70% of the company's gross income.

For a more detailed description of the taxation of dividends received from foreign companies, see the corresponding section on Foreign Income.

Stock Dividends

Corporation Tax does not tax released shares, that is, those shares fully or partially delivered to shareholders in a capital increase made from distributable reserves. However, it is important to consider these actions when calculating the average cost of the shares held, since this cost is relevant to the determination of the tax when the shares are sold.

Interest income

Interest income is considered normal income and is taxed at the normal rate of 25%.

Royalty income

Royalty income is integrated into the corporate tax base along with other types of income.

It is possible to apply a reduction of up to 60% on the net income obtained from the licensing of certain intangible assets, provided that specific requirements are met.

Patents, complementary protection certificates for drugs and plant protection products, as well as registered advanced software, can benefit from the tax incentive known as Patent Box. However, designs and models are only eligible for this incentive if they are legally protected.

Commercial or scientific experiences, commonly referred to as know-how, are not eligible for this tax incentive.

Other Relevant Items

The following items, among others, are excluded or deferred from the corporate tax base:

Distributed Dividends: Dividends distributed that come from profits obtained by companies in tax periods subject to the international flow tax regime are excluded by 95% of their amount.

Healthy Assets and Restructuring: Assets that have been consolidated in accordance with revaluation laws and tax-protected restructuring operations that generate accounting capital gains are also excluded or deferred from the tax base.

Foreign Income

International Income Tax Relief

Companies resident in Spain are taxed on their worldwide income. To avoid double taxation, tax breaks apply to income generated abroad when it is also subject to taxes in Spain.

Motives

Double Economic Taxation: It happens when the same income is taxed in the hands of different taxpayers. For example, if a foreign company pays taxes in its country and a shareholder resident in Spain pays taxes on the dividends or capital gains it receives from that company.

Double Legal Taxation: It occurs when the same income is taxed in two countries in the hands of the same taxpayer. This can happen if income is taxed in the country of origin and again in the recipient's country.

Features

Dividends or profit shares received by a Spanish company from a foreign company can benefit from a 95% exemption, resulting in an effective tax rate of 1.25% for entities subject to the general rate of 25%. For this exemption to apply, the following requirements must be met:

• The Spanish company must have at least a 5% interest in the foreign company for at least one year. This period can be completed after the distribution of the dividend and includes the time during which the participation in another company in the group is maintained.
• The foreign company must have been subject to a tax similar to Spanish Corporation Tax at a minimum rate of 10% during the tax year in which the dividends are obtained. This is true if the country has a Double Taxation Agreement with Spain that includes an information exchange clause.
• The exemption does not apply to dividends that generate a tax-deductible expense in the company that pays them.

Capital gains derived from the sale of shares in foreign companies can also benefit from tax exemption if the same requirements are met.

The exemption does not apply if the subsidiary is in a tax haven, unless it is a member state of the EU and demonstrates that it operates for valid economic reasons and carries out business activities.

As an alternative to the exemption, you can opt for a tax credit based on imputation, which allows you to credit the foreign tax paid on dividend income, up to the limit of the tax that would have been paid in Spain on the gross 95%. To apply this credit, the Spanish company must have held a 5% interest in the foreign company for the 12 months prior to the distribution of the dividend. This credit can be extended indefinitely.

Spanish legislation also allows for relief for double legal taxation through the system of “tax imputation”. This includes gross foreign income in the calculation of Spanish tax and a tax credit is applied for tax paid abroad, limited to the tax that the company would have paid in Spain. The non-creditable part can be considered deductible if it corresponds to business activities carried out abroad. This credit can be applied indefinitely.

Double Taxation Agreements and EU tax directives offer methods to avoid double taxation, primarily through the deduction of the tax actually paid. Some Double Taxation Agreements establish tax exemptions or the exclusive right to tax, and in some cases an amount greater than the tax actually paid is allowed to be deducted.