How do the capitalization reserves work to reduce the taxable income for corporate income tax purposes?

In Spain’s complex tax landscape, corporate income tax is a vital component for companies. Below, we will explore how capitalization reserves can be an effective strategy to reduce the tax base. If you want to optimize your corporate finances and discover how this tool can benefit your company, look no further – read on!

What are capitalization reserves and how do they benefit you for corporate income tax purposes? 

Capitalization reserves is a system whereby companies can allocate a portion of their profits to a reserve account in order to strengthen their long-term financial structure.

This reserve cannot be distributed among partners, but is kept within the company as a backup to face contingencies or make investments in the future. It is a way of capitalizing the company and increasing its capacity for growth and solvency.

Capitalization reserves replace the deduction for reinvestment of windfall profits in the income tax. This strategy encourages companies to strengthen their internal resources by reducing dividend distributions. This results in a lower tax burden.

Prior to this reform, the deduction for reinvestment of windfall profits was common. Now, capitalization reserves emerge as a new central figure.

That being the case, what benefits can this system offer you? Read the main ones: 

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What do you need to apply the 10% corporate income tax deduction for an increase in equity in the taxable base?

Mainly, you should apply the tax rates of Article 29 of the Corporate Income Tax Law (LIS). In this way you can obtain a reduction in the taxable base. This reduction corresponds to 10% of the amount of the increase in the entity’s equity. As long as you meet certain requirements: 

• The increase in the entity’s equity must be maintained on a constant basis for a period of 5 years. Beginning from the end of the tax period to which this reduction in corporate income tax relates. 
• In this sense, the possibility of applying this reduction is excluded if you record accounting losses in the entity during that period.

• A crucial aspect of the process is the creation of a reserve whose value matches the amount of the reduction. This reserve must be reflected in the entity’s balance sheet, with a clear separation and an appropriate title. And it will remain inaccessible for the defined period.
• The reduction may exceed 10% of the value of the positive taxable income for the tax period prior to this deduction.
• This includes the incorporation indicated in section 12 of article 11 of the Corporate Income Tax Law. As well as the compensation of negative tax bases. In other words, this measure is limited to guarantee a balance and coherence within the current tax framework.

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How is the increase in shareholders’ equity calculated?

The calculation of the increase in equity is based on several aspects. Obtain the appropriate corporate income tax reduction: 

• First:

The positive difference between shareholders’ equity existing at the end of the fiscal year. This does not include the results obtained in the same period.

• Second:

Shareholders’ equity at the beginning of the year, also excluding results generated in the previous year.

For purposes of calculating this increase only, please note the following. It is important to highlight that the following categories will not be considered as equity at the beginning and at the end of the tax period: 

The aforementioned categories will also not be taken into account in determining the maintenance of the increase in shareholders’ equity. This during each tax period in which their application is required. This step is key to reduce corporate income tax.

How is the reduction applied in cases of insufficient taxable income? (During the tax period in which the right to the reduction is obtained)

Situations where the taxable income is insufficient to apply the corporate income tax reduction have a solution. The pending amounts can be used in the tax periods ending within the following 2 years. These years must be after the end of the tax period in which the right to the reduction is acquired.

This will be carried out in conjunction with the reduction that may be relevant in the corresponding tax period.

However, it establishes a limit equivalent to 10% of the positive taxable income of the tax period prior to this decrease. Also take into account the integration indicated in paragraph 12 of article 11 of the LIS. In addition, the offsetting of negative taxable income.

In what situations is the use of the reserve disregarded in connection with the reduction of capitalization?

The reduction linked to the capitalization reserves that reduces the taxable income for corporate income tax purposes has its limits. The law will interpret that you have not disposed to the reserve in the following situations:

• When a partner or shareholder exercises his right to separate from the entity.
• In cases where the reserve is totally or partially eliminated. This as a consequence of operations subject to the special tax regime established in Chapter VII of Title VII of the LIS.
• If the entity is obliged to use the reserve by virtue of a legal requirement.

Capitalization reserves are a valuable tool in the field of corporate income tax in Spain. The possibility of reducing the taxable base through this strategy can generate significant advantages for your company in financial terms.

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Are you looking for effective ways to optimize your tax burden and maximize your resources? Don’t hesitate to explore in depth how this reserve can transform your corporate finances. 

Do not miss this opportunity and request your tax advice with us right now through tasconsultoria@tas-sl.es! Our team of experts is ready to provide you with the necessary knowledge and guidance in Corporate Tax or other legal areas.