Tax Groups for Corporate Tax Purposes (IS)

In Spain, companies have the possibility of forming a tax group and applying a special tax consolidation regime for Corporation Tax. This regime allows a group of companies to be treated as a single tax entity for the purpose of calculating and paying the tax. The following are the main characteristics and conditions of this regime:

Requirements

companies must formally approve the constitution of the fiscal group by means of a resolution before the beginning of the first fiscal year in which the fiscal consolidation regime will apply.

The parent company must hold at least 75% of direct or indirect participation and the majority of the voting rights in the group's companies at the beginning of the first fiscal year in which the regime applies. This requirement is reduced to 70% for publicly traded companies. A non-resident company can be the dominant one, provided that it meets certain requirements, such as being taxed by a tax similar to the Spanish IS and not residing in a tax haven. In this case, a resident company must be appointed as a representative of the group to comply with tax obligations.

Resident companies that meet the requirements through non-resident companies can be included in the tax group.

Features

The group's tax base is calculated as the sum of the tax bases of each of the companies in the group.

The negative tax bases of any company in the group can be offset by the tax benefits of the other companies in the group. The compensation is limited to 70% of the taxable base prior to the capitalization reserve and its compensation. In addition, negative tax bases of up to 1 million euros can be offset.

Tax profits and losses derived from transactions between companies in the group are eliminated to calculate the consolidated tax base, except when:

• Transactions are made with third parties.
• A company in the group ceases to be part of the fiscal group.
• The fiscal consolidation regime ceases to apply.
  

The 5% of dividends excluded from the IS holding exemption regime are not eliminated, which can generate a cascade effect in the case of successive dividend distributions.

Tax credits generated by companies before becoming part of the group can be applied up to the limit that would have been applied under the general IS regime. Negative tax bases generated before integration into the group can be offset up to 70% of the individual tax base.

Recent Changes and Application

Royal Decree-Law 3/2016: Introduced stricter limits on the compensation of negative tax bases for taxpayers with a net turnover exceeding 20 million euros. This measure was declared null and void by Constitutional Court ruling 11/2024.

Amendments for 2023: Starting in 2023, the tax base of the tax groups will be calculated as the sum of all the positive tax bases and 50% of the negative tax bases of the entities in the group. The unused negative tax base will be recovered equally for the first ten fiscal years beginning on or after January 1, 2024. If an entity that generated the negative tax base leaves the group, the group will continue to recover the unused negative tax base. If the fiscal consolidation regime ceases to apply, the unused negative tax base will be fully recovered in the last return filed by the group.

Additional Aspects

Property Transfer Tax will not be accrued for payments made between companies in the tax group, such as interest or dividends.

The fiscal consolidation regime offers an efficient way to manage the tax burden within a business group, but it requires compliance with a series of specific requirements and regulations. For more details and the correct application of the regime, it is advisable to consult with specialized tax advisors.

Tax Groups in the Field of VAT

Business groups have the possibility of benefiting from a special tax consolidation regime in relation to VAT. This regime, optional by nature, must be maintained for a minimum period of three years once adopted, with the possibility of extension unless companies decide to expressly resign.

This tax consolidation regime is available only to companies resident in Spanish territory subject to VAT that are not part of any other tax group.

The main entity of the group must be a legal person or financial entity that does not depend on any other entity established in Spanish territory under the scope of VAT.

In addition, their participation in the capital or voting rights of dependent companies must be greater than 50% throughout the entire fiscal year. The companies in the group must be linked through three types of relationships: economic, financial and organizational.

When opting for the VAT consolidation regime, you can choose between two methods of taxation:

1. Aggregation Regime: In this method, the VAT return balances of each company in the group are added together. Each company maintains the right to deduct VAT individually.
2. Consolidation System: In this system, an individual company in the group can choose to reduce the VAT tax base in internal transactions between companies in the group, limiting itself to the “external” cost.

Transfer Pricing

Legal Framework

The principle of full competition regulates transactions between related parties under Spanish transfer pricing regulations. The Spanish Tax Administration has the authority to review the transfer prices used in business-to-business transactions and to make adjustments if the prices established by the taxpayer do not comply with the principle of full competition.

Spanish legislation adopts a broad definition of related parties. The following is an overview of the entities and individuals considered to be linked to a Spanish taxpayer:

• A company and its partners or shareholders.
• A company and its directors or directors, although, in exceptional cases, they will not be considered related parties with respect to the remuneration received for the exercise of their functions.
• A company and the spouses and collateral relatives in the third degree of consanguinity or affinity of the partners, shareholders, directors or directors.
• Two companies that belong to the same business group.
• A company and the directors or directors of another company when both belong to the same business group.
• A company and the spouses and collateral relatives, of the third degree of consanguinity or affinity, of the partners or shareholders of another company within the same business group.
• Two companies in which one indirectly holds at least 25% of the other's share capital.
• Two companies where the same partners, shareholders or their spouses and collateral relatives, of the third degree of consanguinity or affinity, hold, directly or indirectly, at least 25% of the share capital.
• A company resident in Spain and its foreign assets.
• A foreign company and its Spanish assets.
  

In cases of relationships defined under the concept of socio-society, participation must be equal to or greater than 25%. The definition of a group must follow the provisions of article 42 of the Spanish Commercial Code.

Spanish transfer pricing regulations are generally in line with the OECD Guidelines. In Spain, both traditional transactional methods and transactional benefit methods are accepted. If the previously established valuation methods are not applicable, other generally accepted valuation methods or techniques may be used that comply with the principle of full competence.

Documentation

Taxpayers are required to demonstrate that transactions between companies are carried out in accordance with the principle of full competition by studying transfer pricing documentation that complies with legal requirements, largely aligned with the OECD Guidelines. The documentation must include a master file and a local file. Companies that belong to a group with a net turnover of less than 45 million euros can opt for simplified documentation.

If taxpayers do not provide the study of transfer pricing documentation when requested by tax authorities, usually during an audit, they may face penalties. Correct and complete transfer pricing documentation can protect Spanish taxpayers from sanctions if tax authorities propose adjustments to transfer pricing.

Country-By-Country Report (CbC)

The parent company most resident in Spain, or the entities designated within a group with a consolidated turnover of more than 750 million euros, are required to submit the Country-by-Country report within 12 months from the close of each tax period. In accordance with Action 13 of the OECD, this obligation also extends to those entities that, being tax residents in Spain, are not the “ultimate parent company” of a group of multinational companies, provided that certain criteria are met.

The Spanish subsidiaries of a group subject to the obligation to submit the CbC report must comply with the submission of a specific CbC information form. In this form, Spanish subsidiaries must identify the group's company and the territory of residence of the entity responsible for submitting the report.

Information Form 232

Taxpayers in Spain are required to submit a form that details their intercompany transactions, as well as those carried out with tax havens.

This form must be submitted in the month following ten months after the close of the corresponding fiscal year. That is, for fiscal years ending December 31, the filing deadline is November 1 to 30.

Undercapitalization

The rules on undercapitalization have been repealed.

Controlled Foreign Companies

The purpose of the Spanish regulations on Controlled Foreign Companies is to prevent tax residents in Spain, both companies and individuals, from using foreign companies or permanent establishments with low taxation so as not to include passive income generated by such capital in their tax bases. Under this regime, resident tax companies in Spain are subject to Spanish corporate tax on income obtained by a non-resident subsidiary or permanent establishment, provided that certain requirements are met. These requirements include:

• Paid Corporation Tax: The corporate tax payable by the non-resident subsidiary or EP must be less than 75% of what would be paid in Spain.
• Ctrl: In the case of non-resident subsidiaries, the Spanish parent company must hold, directly or indirectly, more than 50% of the share capital, own funds, profits or voting rights of the non-resident subsidiary, either individually or together with other related companies or individuals.
  

The SEC rules do not apply to companies or EPs that are tax residents in the European Union or in a State party to the Agreement on the European Economic Area, provided that the taxpayer can demonstrate that these entities carry out a business activity or are Collective Investment Institutions regulated by EU Directive 2009/65/EC, other than those mentioned in article 54 of the Spanish Corporation Tax Act.

Types of Inclusion

Global:

• It applies if the non-resident company lacks an adequate structure of material and human resources.
• In this case, all income obtained by the non-resident company must be included in the Spanish company's tax base, unless the use of funds from another company in the same group is justified or there are valid economic reasons.

Income Specific:

• When the requirements for international tax transparency are met but not for the “global CFC”, certain types of income obtained by non-resident investee companies must be included in the Spanish tax base:

• Income from real estate assets not affected by a business activity.
• Income from equity participation, dividends and capital gains.
• Capitalization and insurance transactions for the benefit of the company itself.
• Industrial and intellectual property returns, technical assistance, real estate, image rights, leasing or subleasing of businesses and mines.
• Income from transfers of assets and rights mentioned above.
• Income from credit, financial, insurance and service activities that generate deductible expenses in Spanish resident companies.
• Income from derivative financial instruments.
• Income from insurance, credit, leasing and other financial activities, unless obtained in the development of economic activities.
• Transactions on goods and services carried out with related entities, when the non-resident entity adds little or no economic value.
  

The indicated income should not be charged when its amount is less than 15% of the total income of the non-resident entity or EP, except in the case of income generated by derivative financial instruments, which must be charged in its entirety.

Additional Considerations

Income Allocation: The attribution of income is carried out following the principles and criteria established in the Spanish Corporate Tax Act. Imputed income cannot exceed the total income of the foreign subsidiary calculated in accordance with Spanish legislation.

Dividends or Benefit Shares: Dividends or shares in profits received by a Spanish company, corresponding to income already charged under the rules of Controlled Foreign Companies, will not be integrated into the Spanish company's tax base. However, a reduction of 5% will be applied to these dividends or shares for management expenses.