How to reduce a company’s corporate income tax burden
Companies which have made losses in prior years are able to reduce their corporate income tax (IS) expense when they begin to make a profit by offsetting prior-year tax losses. Tax losses can be carried forward for offset in future years and do not expire (under the new IS Law, they remain available for offset indefinitely). There are nevertheless certain restrictions in terms of the amount which can be offset, which can limit the extent to which these losses can be applied and thus increase the company’s IS expense.
The new IS rules have placed substantial restrictions on the possibility of applying tax losses, effective for 2016 and subsequent years, by introducing a limit of 60% of the tax base for 2016, which will go up to 70% for 2017 and subsequent years. To mitigate the impact of this restriction, the IS Law stipulates that it shall only apply above 1 million euros per annum. In other words, tax losses amounting to 1 million euros a year can be offset in any event, regardless of the application of the above limit.
As a general rule, these limitations do not apply for 2015. The IS Law nevertheless envisages a transitional regime under which only companies with a turnover in excess of 20 million euros in the preceding year are subject to limitations on the tax losses they can offset for 2015 IS purposes. Under this regime, in 2015, the offsetting of tax losses will be limited to 50% of the tax base for companies with a turnover of between 20 and 60 million euros for the previous year, and 25% where such turnover exceeds 60 million euros. Small and medium-sized companies, however, are subject to no restrictions on the offsetting of tax losses in 2015.
The Directorate-General of Taxes has adopted a flexible approach towards the application of this restriction in 2015, reaching the conclusion (in binding ruling V105716) that the rule that 1 million euros can be offset in any event is also applicable). Therefore, in 2015 the taxable income of companies with a turnover in excess of 20 million euros can be reduced through the application of prior-year tax losses by up to 25% or 50% of the tax base (depending on turnover). A minimum threshold of 1 million euros is applicable in any event.
In short, to calculate IS correctly, tax losses generated in prior years need to be reviewed and the limits in force for each tax year need to be correctly applied when offsetting them. A correct analysis can reduce the tax burden significantly for companies which, having generated losses in prior years, have begun to make profits.
Garrigues Tax Department