Capitalization reserve: Interpretative criteria
Since the “capitalization reserve” tax incentive came into force, there has been much talk of the doubts of an interpretative nature generated by the wording of the article of the Corporate Income Tax Law by which it is regulated.
Broadly speaking, this tax incentive envisages the application of a reduction to the Corporate Income Tax base equal to 10% of the increase in the company’s equity. This is subject to the requirement that such increase be maintained within the company for 5 years and that a restricted reserve be recorded for the duration of such period equivalent to the amount of the reduction applied for Corporate Income Tax purposes.
Over the last year and a half, the Directorate General of Taxes has published various rulings on this question with a view to clarifying some of the doubts which have been brought to its attention. The following are some examples:
In 2016, the requirement regarding the appropriation to the restricted reserve is deemed met provided that the transfer is effected formally within the period allowed by commercial legislation for the approval of the 2016 annual accounts, even if it is complied with formally in the balance sheet corresponding to the annual accounts for 2017 rather than that corresponding to 2016. Similarly, this reserve is to remain restricted for a period of 5 years counted as from December 31, 2016 (assuming that the taxpayer’s financial year for both commercial law and tax purposes coincides with the calendar year).
The maintenance requirement refers to the amount by which shareholders’ equity is increased overall, and not to each of the equity items which have been increased. Consequently, the disposal of any of the items of which shareholders’ equity is made up at the end of the year in which the increase takes place does not imply non-fulfillment of the maintenance requirement, provided that the overall amount by which equity is increased is maintained.
In the case of corporate groups which are taxed under the consolidated tax regime,
the increase in the shareholders’ equity of each group is to be calculated taking into consideration the sum of the equity accounts of the companies making up the group, without any eliminations or inclusions being applied.
The increase in consolidated shareholders’ equity from the accounting perspective is therefore not to be considered.
It will nevertheless be interesting to see the position adopted by the tax inspectors when they begin to review the criteria applied by taxpayers.
Garrigues Tax Law department