Invest in The Basque Country

Basic guide to labour, commercial, accounting and tax regulations

Sayma SPRI
Corporation Tax2019-05-17T12:21:11+02:00

CORPORATION TAX

01. BASIC ASPECTS OF THE TAX

Tax agreed under autonomous regulations that levies the receipt of income from companies for each financial year (tax period).

Corporation Tax payers are entities (legal entities) resident in the Basque Country, with a registered office and effective address therein and, by remission of non-resident income tax, also non-resident entities in Spanish territory that operate and obtain income in the Basque Country through a permanent establishment.

The income on which Corporation Tax is applied is calculated on the basis of the accounting profit for the tax period, adjusted for various tax adjustments established in the provincial regulations governing tax.

The settlement structure for this tax is as follows:

+/- Accounting profit
+/- Tax adjustments and allocations
= Prior taxable base
Corrections relating to applying the result
Offsetting of tax losses
= Taxable income
x Tax rate
= Gross tax payable
Deduction for double taxation
= Tax liability
Deductions with quota limit
= Effective rate
Withholding tax
Payment by instalments
= Cash amount payable or refundable

02. TAX RATES

  BASQUE COUNTRY COMMON TERRITORY
Medium-sized and large companies 24% 25%
Small companies 20% 25%
Micro-companies (*) with tax offset 20%(*) 18% 25%
Start-ups 15% (1st year with taxable base + and the following)

Micro-companies

  1. Where the volume of transactions or total assets <= 2 million euros (€M)
  2. And where the average workforce < 10 employees

Small companies

  1. Where the volume of transactions or total assets <= €10 M
  2. And where the average workforce < 50 employees

Medium-sized companies

  1. Where the volume of transactions <= €50 M or total assets <= €43 M
  2. And where the average workforce < 250 employees

Large companies

The remaining companies.

The figures to be taken into account are those of the prior tax period and, where applicable, refer to all entities in the corporate group.

The tax standard establishes minimum tax rates to be applied on the taxable base (not on the accounting profit).

  MINIMUM TAXATION
  With maintenance or creation of permanent employment Without maintenance of permanent employment
Medium-sized and large companies 15% 17%
Small companies 13% 15%

03. EFFECTIVE RATES

The application of different tax incentives regulated in the Provincial Law on Tax (reductions in taxable base and tax credits) may significantly reduce the tax to be paid, giving rise to effective rates well below the nominal rates described in the previous point.

REDUCTIONS IN TAXABLE AMOUNT
Offsetting tax losses (Limit 50%/70% of the taxable amount) 100% of the tax loss generated
Investments in the capital of start-ups (Limit of 45% of the taxable amount) 60% of the investment
Capitalisation. Notional interest (no limit) 10% of the increase in reserves
Reserves for future losses (Limit up to 15%/10% of the profit) 100% of the provision
Patent Box No integration 70% of net income generated
Exemption for reinvestment in fixed assets No integration 100% of income generated
TAX CREDITS
Applicable with a limit of 35% on the tax liability
Investments in new non-current assets 10% / 5%
Creation of employment 5.000 € / 10.000 €
Environmental investments 30%/15%
Investments in film productions and audiovisual series 30% (producer)
Book publishing 5%
Applicable with a limit of 70% on: tax liability – deductions of 35%
Research and development activity 30% / 50% (+20% in certain cases)
Technological innovation activity 15%/20%

In application of the above, for companies that maintain or create permanent employment, deductions with a limit of 35% on the tax liability and companies that carry out R&D&I activities, the effective taxation on the taxable base co

Medium-sized / large companies

Result from the profit and loss account after adjustments 1.000,00
Reduction
Proof of taxable income 1.000,00
Offsetting prior year negative tax bases (tax loss carryforwards)
Taxable income / net tax base 1.000,00
Tax rate 24,00%
Gross tax payable 240,00
Deduction for domestic double taxation
Deduction for international double taxation
Gross tax payable 240,00
Deductions with a limit of 35% 84,00
Deductions with a limit of 70% 109,20
Effective tax payable 46,80
Effective rate 4,6800%

Small companies

Result from the profit and loss account after adjustments 1.000,00
Reduction
Proof of taxable income 1.000,00
Offsetting prior year negative tax bases (tax loss carryforwards)
Taxable income / net tax base 1.000,00
Tax rate 20,00%
Gross tax payable 200,00
Deduction for domestic double taxation
Deduction for international double taxation
Gross tax payable 200,00
Deductions with a limit of 35% 70,00
Deductions with a limit of 70% 91,00
Effective tax payable 39,00
Effective rate 3,9000%

Micro-companies

Result from the profit and loss account after adjustments 1.000,00
Micro-company reduction -100,00
Proof of taxable income 900,00
ffsetting prior year negative tax bases (tax loss carryforwards)
Taxable income / net tax base 900,00
Tax rate 20,00%
Gross tax payable 180,00
Deduction for domestic double taxation
Deduction for international double taxation
Gross tax payable 180,00
Deductions with a limit of 35% 63,00
Deductions with a limit of 70% 81,90
Effective tax payable 35,10
Effective rate 3,5100%

04. OFFSETTING OF NEGATIVE TAX BASES (TAX LOSSES)

If the tax base is negative, this amount may be offset against positive income from tax periods ending in the following 30 years.

The offsetting has a quantitative limit of 50% of the taxable base prior to such offsetting, with this limit being 70% for micro and small enterprises. This limitation does not apply:

  • On the amount of the income relating to acquittals or settlements from agreements with the taxpayer’s creditors
  • In the tax period in which the entity is wound up, unless it occurs in a restructuring operation to which the tax neutrality regime applies.

In certain cases, the offsetting of tax losses on the acquisition of companies that have been inactive is limited.

05. AMORTISATION AND DEPRECIATION OF FIXED ASSETS

Amounts that relate to the effective depreciation and amortisation of tangible and intangible fixed assets and investments in property as a result of their operation, use, enjoyment or obsolescence and that are also recognised in the accounts are deductible.

Depreciation/amortisation is considered to be effective when the following maximum rates are applied:

Buildings for residential, office and commercial use and for services 3%
Buildings and halls for industrial use 5%
Installations 20%
Machinery for industrial use 20%
Machinery for other uses 15%
Vessels and aircraft 10%
Buses, lorries, vans and similar 20%
Passenger vehicles 20%
Moulds, models, dies and matrices 33,33%
Tools and equipment 33,33%
Furniture 15%
Computer equipment 33,33%
Videos for rent 50%
Other unspecified items 10%

The minimum depreciation rate is 6.66%, except in the case of properties, which is 2%, and vessels and aircraft, which is 4%.

There are special rules for assets used, for those that are used daily in more than one normal work shift, for improvements made to items and for those acquired under financial leases.

Declining-balance depreciation is also possible, except for buildings, furniture, fixtures and fittings that are second-hand.

There are certain cases in which items can be depreciated freely, without the need for an accounting record:

  • Tangible and intangible fixed assets, the unit value of which does not exceed 1,500 euros.
  • New tangible assets, except buildings and certain means of transport, acquired by micro and small companies
  • Tangible and intangible assets, excluding buildings, assigned to research and development activities. Buildings assigned to these activities can be depreciated on a straight-line basis over ten years.
  • Research and development expenses capitalised as intangible assets.
  • New tangible assets assigned directly to reducing and correcting the polluting impact of the company’s activity (upon request).
  • Tangible and intangible assets directly related to cleaning up contaminated soils for those projects approved by official bodies of the Basque Country (upon request).

Medium-sized companies may depreciate new tangible assets, excluding buildings and certain means of transport, based on the coefficient resulting from multiplying the maximum depreciation coefficient set out in the table above by 1.5. que resulte de multiplicar por 1,5 el coeficiente de amortización máximo previsto en la tabla anterior.

Micro-companies may opt to consider 25% of the net tax value of assets of that nature in each tax period, excluding the value of non-depreciable assets, as deductible under the concept of the combined depreciation of tangible and intangible assets and investment property, excluding certain means of transport.

Intangible assets

Intangible assets are amortised over their useful lives. If it is not possible to make a reliable estimate, amortisation is deductible with a maximum annual limit of 10%.

In the case of goodwill, accounting provisions for amortisation are not deductible, although 12.50% of the amount is deductible for tax purposes every year, without the need for an accounting record, provided that it has not been acquired from another group entity. If acquired from another group entity, any impairment losses on goodwill that can be credited are deductible.

Deductibility of Financial Goodwill

The tax amortisation of financial goodwill (tax incentive only applicable in the Basque Country and not in the rest of Spain) is also deductible, with requirements. When shares are acquired (from entities that are not part of the group), the amount of the difference between the acquisition price of the holding and the equity of the investee at the acquisition date, in proportion to its holding, is allocated to the assets and rights of the investee and the part of the difference that would not have been allocated is deductible up to a maximum annual limit of 12.50%.

06. VALUE ADJUSTMENTS: IMPAIRMENT LOSSES AND PROVISIONS

The impairment of loans due to the insolvency of debtors is only deductible if one of the following circumstances is met:

  1. Six months have elapsed since the maturity of the obligation.
  2. The debtor has been declared bankrupt.
  3. The debtor or, if the debtor is an entity, one of its directors or representatives, is prosecuted for the crime of asset stripping.
  4. The obligations have been claimed in court or they are the subject of a court case or arbitration proceedings, the recovery of which depends on the decision of the court or arbitration.

There are certain cases in which impairment is not deductible, such as, for example, impairment due or backed by public sector bodies, impairment that is duly guaranteed and backed, impairment that has been extended, impairment based on estimates of the risk of insolvency and impairment agreed between related parties, except in judicially declared insolvencies.

Micro, small and medium-sized companies may consider impairment for insolvency of up to 1% of debtors’ accounts deductible at the end of the tax period, with some exclusion. This impairment loss balance may not exceed the previous limit.

Impairment of holdings in other entities: unlike the provisions for the common territory (the r

  1. In the case of holdings of less than 5% of the capital of unlisted entities or listed groups, the difference between shareholders’ equity at the start and end of the financial year, in proportion to the holding.
  2. In the case of holdings of 5% or more (3% if listed), the difference between the acquisition price and the equity of the investee, adjusted for unrealised capital gains at the valuation date.

Also, unlike the provisions for the common territory (the rest of Spain), the impairment of tangible and intangible assets and property investments is deductible in the Basque Country.

Provisions are not deductible until the following are applied to their purpose:

  1. Those arising from implicit or tacit obligations.
  2. Those of a long-term nature for staff remuneration.
  3. Those relating to the costs of fulfilling contracts that exceed the economic benefits expected from them.
  4. Those arising from restructuring.
  5. Those relating to the risk of sales returns.
  6. Those for staff remuneration with payments based on equity instruments.
  7. Those relating to non-deductible expenses or losses.
  8. Those relating to environmental actions if they do not correspond to a plan formulated by the taxpayer and accepted by the tax authorities.
  9. Those for financial expenses arising from adjustments due to the restatement of the value of non-deductible provisions.

07. LIMITATION ON THE DEDUCTIBILITY OF FINANCIAL EXPENSES

Net financial expenses (financial income from the transfer of capital) are deductible up to a limit of 30% of the operating profit for the year (EBITDA). In any event, an amount of 3 million euros is deductible.

Net financial expenses that have not been subject to deduction can be deducted in subsequent tax periods with no time limit, and unused excess operating profit (difference between net financial expenses and 30% of EBITDA) can be carried forward in the following five years, increasing the limit to be considered for deduction.

08. NON-DEDUCTIBLE EXPENSES

The following expenses are not tax-deductible:

  1. Those that represent a remuneration of own funds
  2. Those arising from accounting for corporation tax Those from such accounting does not count as income
  3. Fines, penalties and surcharges
  4. Losses from gambling
  5. Donations and gifts
  6. Allocations to provisions or internal social welfare funds
  7. Those for services with tax havens, unless proven to be otherwise
  8. Expenditure where limitations on cash payments apply
  9. Bribes
  10. Expenses with related parties that, as a result of a different tax classification in these, do not generate income or generate income that is exempt or subject to a nominal tax rate of less than 10%

The following are partially deductible:

  1. Expenses for public relations relating to restaurant services, hotel and catering services, travel and secondments are deductible at 50%, with a joint maximum limit of 5% of the volume of operations.
  2. Presents and other gifts, provided that the unit amount per recipient and tax period does not exceed 300 euros. Any excess is not deductible.
  3. Specific limits for expenditure relating to the acquisition, leasing, repair, maintenance, depreciation and any other expenditure relating to the use of motor vehicles and their trailers, mopeds and motorcycles.

09. NON-INCLUSION IN THE TAX BASE OF CERTAIN INCOME

There are various cases of non-inclusion of income which are detailed below.

Elimination of double taxation

The aim of these measures is to avoid both legal and economic double taxation. The former occurs when the same taxpayer’s income is taxed in two different states and the latter when the same income is taxed on two different taxpayers.

The exemption method is applied to avoid economic double taxation on dividends and capital gains and also for income obtained abroad through a permanent establishment.

Requirements for exemption:

  1. That the direct or indirect holding in the entity is at least 5% (3% if listed) and that it has been held uninterruptedly during the previous year or, in the case of dividends, that it is held subsequently and this term is completed.
  2. That the investee is subject to, and not exempt from, Corporation Tax or a tax of an identical or similar nature to this tax that has levied at a nominal tax rate equal to or greater than 10%.
  3. That profits come from carrying out business activities, for which it is essential that at least 85% of the income relates to this type of income.

In the case of capital gains, the exemption is applicable with respect to financial years in which points (b) and (c) above are fulfilled.

The deduction method is used in certain cases of dividends and capital gains in which not all of the above requirements are met and also for taxes paid abroad, in which case the lower of the following amounts may be deducted:

  • Tax paid abroad
  • Tax payable if the income had been obtained in the Basque Country

Exemption for reinvestment of extraordinary profits

Tax incentive only in the Basque Country and not in the rest of Spain that consists of the total or partial non-inclusion of the income obtained through the onerous transfer of tangible or intangible fixed assets or property investments intended for business operations when they are reinvested.

For non-inclusion, the amount obtained in the aforementioned transfers must be reinvested in the same types of items, intended for business operations, within the period between the year prior to the date of delivery or making available of the transferred asset and the following 3 years.

Assets subject to reinvestment must remain in the taxpayer’s equity in compliance with the established requirements, except for justified losses, for a period of 5 years, or 3 years in the case of movable property, from the time the reinvestment is made, unless its useful life is shorter.

Patent box

Tax incentive consisting of the (partial) non-inclusion in the taxable base of 70% of the net income generated by the operation through the temporary assignment to third parties of the right to use or exploit the intellectual or industrial property of the entity that has been developed by the entity itself or through subcontracting unrelated third parties. If this is not the case, non-inclusion may also be applied at the same percentage, provided that the proportion of the expenditure incurred through such acquisition or subcontracting does not exceed 30% of the expenditure directly related to the development of intellectual or industrial property by the entity itself or through subcontracting unrelated third parties (proportional reduction if it exceeds it).

Only the assignment of patents, utility models, supplementary protection certificates of medicines and plant protection products, or registered advanced software obtained as a result of research and development projects give the right to this reduction.

Trademarks, literary, artistic or scientific works, including motion pictures, personal rights subject to assignment, such as image rights, rights of industrial, commercial or scientific equipment, rights of plans, secret formulas or procedures, rights on information relating to industrial, commercial or scientific experiences, design or computer program rights other than those referred to above, or any other right or asset other than those indicated do not give this right.

Corrections relating to applying the result

Three special reserves are regulated that make it possible to reduce the taxable base:

  1. Offsetting to promote entrepreneurial capitalisation.
  2. Special reserve for profit equalisation.
  3. Special reserve for promoting entrepreneurship and strengthening the production activity.
    • The purpose of offsetting to promote business capitalisation is to incentivise an increase in the equity of companies, establishing a reduction in the tax base of 10% of this increase (14% for micro and small companies).
    • The purpose of the special reserve for profit equalisation is to earmark up to 10% (15% for micro and small enterprises) of the current distributable profits (with limitations) for offsetting future tax losses (period of 5 years).
    • And the special reserve for promoting entrepreneurship and strengthening the production activity, consisting of a reduction in the tax base of 60% of the amount of the positive accounting result to be allocated to this special reserve (with limitations), is regulated to stimulate investments in the following items (with requirements):
  4. The acquisition of new non-current assets.
  5. The acquisition of assets in the field of sustainable development and the protection and improvement of the environment.
  6. The acquisition of holdings in unlisted entities on the primary market that implement relevant business projects (new activities, products or markets, the expansion or consolidation of existing ones or the creation of stable jobs).
  7. Equity holding in the initial stage of developing a new business project or in its development phase, of micro, small and medium-sized companies with high growth potential, being able to participate in their management (business angels).

10. DEDUCTIONS TO INCENTIVISE CARRYING OUT SPECIFIC ACTIVITIES

  1. Deduction for investments in new non-current assets. Up to 10% of investments made, with a minimum and requirements to be met.
  2. Deduction for research and development activities. Also with requirements, from 30% to 70% of the expenses incurred in these activities.
  3. Deduction for technological innovation activities. 15% or 20% of expenditure, depending on the type of activity carried out.
  4. There is also the possibility of transferring deductions to taxpayers who finance research and development or technological innovation projects.
  5. Deduction for investments and expenditure linked to projects aimed at sustainable development, conservation and improvement of the environment and more efficient use of energy sources. 15% or 30% of expenditure and/or investments made, depending on their nature.
  6. Deduction for the creation of permanent employment. In general, up to 5,000 euros per employee. Up to 10,000 euros for groups with particular difficulties in entering the labour market.
  7. Other deductions for promoting culture: producing films and series (30%) and publishing books (5%).

The above deductions can be applied with a limit of 35% of the tax liability, except for research and development and technological innovation, which are applied with a limit of 70% of the tax liability (80.50% if combined with the previous one). The period for applying them is 30 years.

There is a minimum taxation depending on the fiscal size of the company, which also limits the application of previous deductions (except for research and development and technological innovation).

11. WITHHOLDING TAX AND PAYMENTS ON ACCOUNT

Certain earnings obtained by taxpayers are subject to withholding in the form of a payment on account of corporation tax, with a general withholding percentage of 19%.

Moreover, medium-sized and large companies are obliged to make a payment on account for corporation tax for an amount of 5% of the taxable base (after offsetting tax losses) for the last tax period for which the self-assessment period is due on October 1 of each year, deducting thereafter the withholdings and payments on account made on the taxpayer’s income corresponding to that same tax period.

This payment on account will reduce the effective corporation tax rate for the year.