How to reduce Corporation Tax is a very timely question at this point in the year. There is little left to close the fiscal year but we can already know more or less how much we will have to pay in 2020.
Next, the experts of our Tax Consulting Department propose a series of recommendations to reduce the tax bill, and we remember the main elements that must be reviewed before closing 2019 fiscal year.
How to reduce Corporation Tax
Some last minute recomendations to reduce Corporation Tax for this year.
Tax Adjustments to Accounting
At the end of the year, it is time to remember and review the differences between accounting and fiscal criteria when considering a deductible expense. If necessary, modify them.
It must be verified, in relation to the deductibility of customer and supplier services, that the limit of 1% of the net turnover for the year is not exceeded. The excess will not be deductible as it is considered a non-deductible donation such as donations or donations.
With respect to the expense derived from the remuneration of the position of Administrator. Both the remuneration condition and the form of remuneration must be specified in the Articles of Association in order to be considered deductible.
Patrimonial” Company
It is also time to check whether there is a risk of having converted the company into an equity entity through the equity investments made throughout the year. In accordance with article 5 of Law 27/2014 on Corporate Income Tax, more than half of the company’s assets are made up of securities or are not related to an economic activity. Deducted from the average of the quarterly balance sheets for the financial year.
With respect to the activity of leasing real estate, in order for there to be economic activity avoiding the patrimonial nature, it is required that at least one person has a full-time employment contract, but also, according to the criteria of the Directorate General of Taxes, TEAC, and Supreme Court, a “minimum volume and workload that justifies the need to have such means”.
The consequences of the company’s patrimony are of special importance:
- First, the exemption may not be applied on dividends and on income derived from the transfer of shares
- the tax incentives of small companies may not be applied
- in the case of newly created companies the 15% tax rate may not be applied
- the possibility of offsetting negative Tax Bases is excluded
- the holding of their shares is not exempted in the Patrimony Tax
- and the application of the favourable system of business succession between family members, which entails a considerable reduction in the Tax Base of the Inheritance and Gift Tax, is prevented.
Capitalization Reserve
One of the mechanisms to reduce the IS 2019 tax bill is the application of this benefit. It allows the tax base to be reduced by 10 % of the amount of the increase in own funds, up to a maximum of 10 % of the tax base prior to this reduction. To the integration of the provisions for impairment of credits of Article 11 paragraph 12 LIS. And the offsetting of negative tax bases. Subject to the following conditions:
- The increase in the institution’s own funds is maintained for a period of five years, except for the existence of accounting losses in the institution.
- Provision of a reserve for the amount of the reduction. It must appear on the balance sheet with absolute separation and appropriate title and will be unavailable for a period of 5 years.
Offsetting of tax loss carryforwards from previous years
It is possible to offset the positive tax base of the financial year with the negative tax base of previous financial years, without time limit, and without restriction up to 1,000,000€. From this amount is limited to 70% of the taxable base prior to the application of the capitalization reserve.
And when the net turnover reaches 20,000,000€. The compensation will be limited to 50% of the previous taxable base. And if it reaches 60,000,000€ it will be limited to 25%.
Entities with Reduced Dimension (ERD)
It is particularly relevant to monitor whether the ERD requirements will no longer be met because of their tax implications. This regime will be applied whenever the net turnover in the immediately preceding tax period is less than 10,000,000€. The tax incentives will be applied in the 3 fiscal years immediately following that in which the entity reaches 10,000,000€. Provided that the conditions to be considered as an ERD have been met both in that period and in the 2 years prior to the latter.
Incentives are:
- The freedom to depreciate new tangible fixed assets and employment-generating real estate investments. It is conditional on an increase in the average workforce of the company for 24 months with respect to the previous 12 months. Maintaining the level, 24 months more. And conditioned quantitatively by an amount resulting from multiplying 120,000€ by the increase in staff calculated with two decimal places.
- Accelerated depreciation for investments in new items of property, plant and equipment and intangible assets. They may be depreciated on the basis of the coefficient resulting from multiplying x 2 the maximum straight-line depreciation coefficient provided for in the officially approved depreciation tables.
- Deduction of impairment losses on loans due to possible insolvency of debtors. ERDs may deduct the impairment loss on loans to cover the risk of possible insolvencies up to a limit of 1 %. On existing debtors at the end of the year in which this ERD tax regime applies.
- Equalisation reserve. The provisioning of this reserve, which is unavailable, makes it possible to reduce the IS tax base by up to 10 % of its amount. With a maximum annual limit of 1,000,000€. However, this applied reduction will have to be added to the tax bases of the five tax periods immediately following the application period. As the taxpayer generates negative tax bases, and up to the amount thereof. If no negative bases are generated, the reduced amounts are added to the positive base for the fifth year. This results in tax deferral.
If you need help, do not hesitate to contact us.
Arrabe Integra
Tax Consulting
