These new rules are applicable for fiscal years beginning from 2024 and have been introduced to align Spanish regulations with the ATAD Directive.
The deductibility of financial expenses in Corporate Tax (“CIT”) is one of the most controversial aspects in the scope of this tax.
The general rule (established in Article 16 of Law 27/2014, of November 27, on CIT -“CIT Law”-) states that taxpayers can deduct their net financial expenses for the period up to an annual maximum limit of 30% of the operating profit for the fiscal year (with a minimum of 1 million euros). The non-deductible amount in one period can be deducted in subsequent periods under the same restrictions.
Until fiscal years beginning in 2023, the rule established that, to determine the aforementioned operating profit, one should start from the operating result of the profit and loss account, (i) eliminating the effect of fixed asset depreciation, the allocation of certain subsidies, impairment, and the result of fixed asset disposals, and (ii) adding certain financial income from equity instruments.
However, effective for tax periods beginning on or after January 1, 2024, the fifth final provision of Law 13/2023, of May 24, modified the third paragraph of section 1 of Article 16 of the CIT Law to add that, for the purposes of determining the company’s operating profit, “income, expenses or revenues that have not been integrated into the tax base of this Tax” cannot be considered.
Although this legal reform responds to the provisions of Article 4 of Council Directive (EU) 2016/1164 of July 12, 2016 (known as “ATAD” -Anti-Tax Avoidance Directive-), the Spanish regulation has gone further.
Indeed, in recital (6) of the Directive, it is stated that “[…] Tax-exempt income should not be set off against deductible borrowing costs. This is because only taxable income should be taken into account in determining the amount of interest that can be deducted”; and in section 2 of Article 4, it is established that “[…] Tax-exempt income shall be excluded from the EBITDA of the taxpayer”. However, the new wording of Article 16 of the CIT Law not only excludes exempt income from the operating profit but also other income and expenses or revenues that have not been integrated into the tax base.
This wording has been raising numerous doubts, as it is not clearly established what type of income, expenses, or revenues should be excluded from the computation of operating profit, beyond the reference to not having been integrated into the tax base. Among others, it is questioned whether any type of expense or income that has been adjusted when calculating the tax base should be excluded, regardless of its temporary or permanent nature or even whether it has been part of the prior calculation of operating profit.
In its resolution V1845-24, of August 2, the General Directorate of Taxes (“DGT”) offers its criteria on how the rule should be interpreted. Specifically, it establishes the following rules:
- If the income or expenses are not part of the operating profit, these should not be considered to adjust that operating profit, regardless of whether they are subject to an off-book adjustment (temporary or permanent) to determine the tax base. An example can be found in depreciation or in the tax expense itself which, as they do not form part of the operating profit, are not affected by the new rule.
- If the income or expenses are part of the operating profit, to determine their impact on the limitation of deductible financial expenses, it is necessary to distinguish the type of off-book adjustment in question.
If the adjustment is permanent and is not definitively integrated into the tax base, the affected expense or income should be excluded from the calculation of operating profit. An example is that of dividends exempt at 95% due to the application of the exemption to avoid double taxation. In this case, the amount of the dividend that should be excluded from the computation of operating profit will be that of the net adjustment in the tax base (i.e., 95% of the dividend amount).
If the adjustment is temporary, the expense or income will not be excluded from the calculation of operating profit, as its exclusion from the tax base is not definitive, as occurs, for example, with temporary adjustments for non-deductible provisions or impairments or those derived from a different tax allocation of income or expenses compared to that established in the accounting standard.
In conclusion, the modification introduced in Article 16 of the CIT Law effective for 2024 represents a significant change in determining the deductible financial expense in CIT. The recent clarification from the DGT offers greater precision on its scope and interpretation, according to the administrative criteria, although there is still room for analysis and interpretation based on each particular case, considering the literal wording of the rule and the differences between the Spanish rule and the wording of the Directive.
