Reductions in the taxable base

Taxpayers who pay taxes at the rate provided for in sections 1 or 6 of article 29 of the LIS will be entitled to a reduction in the tax base of 20% of the amount of the increase in their equity, provided that the following requirements are met:

1. That the amount of the increase in the entity's equity is maintained for a period of 3 years from the close of the tax period to which this reduction corresponds, except for the existence of accounting losses in the entity.

2. That a reserve be set up for the amount of the reduction, which should be included in the balance sheet, clearly separated and named, and shall not remain unavailable for the period stated in the previous point.

With effect from 1 January 2025, section 1 of article 25 of Law 27/2014, of 27 November, on Corporate Income Tax, is amended by section Two of the Eighth Final Provision of Law 7/2024, in order to enhance this tax incentive :

• As a general rule, the reduction in the tax base, as a capitalisation reserve, is increased ## from 15 to 20% of the amount of the increase in its equity, provided that the required conditions are met.

• Notwithstanding the foregoing, the percentage of reduction in the tax base is linked, as a capitalization reserve, to the increase in the average workforce of the taxpayer. Thus, taxpayers will be entitled to a reduction in the tax base:

  • From 23% of the amount of the increase in equity, provided that the total average workforce, in the tax period, has increased, with respect to the total average workforce of the immediately preceding tax period, by a minimum of 2% without exceeding 5%.

  • From 26.5% of the amount of the increase in equity, provided that the total average workforce, in the tax period, has increased, with respect to the total average workforce of the immediately preceding tax period between 5 and 10%.

  • When the aforementioned increase is greater than 10% , the reduction to which the taxpayer will be entitled will be 30% .

• The increase in staff must be maintained for a period of 3 years from the close of the tax period to which the reduction corresponds.

• A limit is established on the right to reduction of the tax base, as a capitalization reserve, such that it may not exceed the following amount:

  • 20% of the positive tax base of the tax period prior to this reduction, to the integration referred to in section 12 of article 11 of Law 27/2014, of November 27, on Corporate Income Tax, and to the compensation of negative tax bases.

  • 25% of the positive tax base of the tax period prior to this reduction, to the integration referred to in section 12 of article 11 of Law 27/2014, of November 27, on Corporate Income Tax, and to the offsetting of negative tax bases, in the case of taxpayers whose net turnover is less than 1 million euros during the 12 months prior to the date on which the tax period to which this reduction corresponds begins.

It is only possible to know the increase of own equity that has taken place in a tax period at the end of said period, whereby there has been an increase in the entity's reserves. The formal requirement to record a reserve in the balance sheet that is qualified as unavailable, with absolute separation and a specific description, will be understood as met, provided that the formal provision of said capitalisation reserve takes place during the period that has been legally established by trade regulations for the approval of the annual accounts, for the fiscal year corresponding with the tax period during which the reduction is applied.

Specifically, for the purposes of applying a reduction in the gross tax base in a tax period, where the accounting period coincides with the calendar year, to the extent that at 31 December there has been an increase in shareholders' equity with respect to the amount recorded at 1 January, according to the terms defined in article 25 of the Spanish Corporation Tax Act, and there has been an increase in reserves, regardless of whether or not it has been formally recorded in the capitalisation reserve, the reduction stated in the said article can be applied to the gross tax base for that tax period, availing of the term stipulated in mercantile regulations for the approval of the annual accounts for the year to reclassify the corresponding reserve to the capitalisation reserve, so that it is stated in the balance sheet completely separately and properly named, although this formal requirement applies to the balance sheet in the following year's annual accounts. This reserve cannot be distributed for a period of 5 years from 31 December of the year in which the reduction is applied.

Failure to comply with the requirements set forth for the reduction of the capitalisation reserve will give rise to the adjustment of the unduly reduced amounts, and the corresponding default interest, in line with the terms established in article 125.3 of the said Act.

An increase in equity is determined by the positive difference between the equity existing at year end, not including the results of the same, and the equity existing at the start of the same, not including the results of the previous year.

However, for the purposes of determining this increase, the following will not be considered equity at the start and the end of the taxable period:

1. Contributions by partners.

2. Increases in capital or equities due to offsetting of credits.

3. Increases in equities due to operations with own stock or of restructuring.

4. Legal or statutory reserves. Given that the reserve for reinvesting in profits has a legal origin, it will not be calculated in the own funds taken into account in relation to the capitalisation reserve.

5. Legal or statutory reserves.

6. Restricted reserves provided by application of that set forth in article 105 of this Act and article 27 of Act 19/1994, on modification of the Fiscal and Economic Regime of the Canary Islands.

7. Equity that corresponds to an issue of compound financial instruments.

8. Equity corresponding to variations in assets due to deferred tax derived from a decrease or increase in the tax rate of this type of lien.

These items will not be taken into account when determining the maintenance of the increase in equity in each tax period in which it is required.

In the event of insufficient tax base to apply the reduction, the outstanding amounts may be applied in the tax periods ending in the 2 years immediately following the close of the tax period in which the right to the reduction was generated, together with the reduction that may correspond, where applicable, in the corresponding tax period, and with the limit of 10% of the positive tax base of the tax period prior to this reduction, to the integration referred to in section 12 of article 11 of the LIS and to the compensation of negative tax bases.

The aforementioned reserve shall not be deemed to have been used in the following cases:

1. When a partner or stockholder exercises his right to separate from the company.

2. When the reserve is eliminated, totally or partially, as a result of operations to which the special tax regime established in Chapter VII of Title VII of the LIS applies.

When the company is obliged to use this reserve for legal reasons.

It is only possible to know the increase of own equity that has taken place in a tax period at the end of said period, whereby there has been an increase in the entity's reserves. The formal requirement to record a reserve in the balance sheet that is qualified as unavailable, with absolute separation and a specific description, will be understood as met, provided that the formal provision of said capitalisation reserve takes place during the period that has been legally established by trade regulations for the approval of the annual accounts, for the fiscal year corresponding with the tax period during which the reduction is applied.

Specifically, for the purposes of applying a reduction to the tax base for a tax period in which the entity's financial year coincides with the calendar year, to the extent that as of 31 December of that year there has been an increase in equity compared to that existing on 1 January, as defined in article 25 of the LIS , and there has been an increase in reserves, regardless of whether the capitalisation reserve is not formally registered, the reduction provided for in said article may be applied to the tax base for said tax period, with the period provided for in commercial law for the approval of the annual accounts for the year being available to reclassify the reserve corresponding to the capitalisation reserve, so that it appears on the balance sheet with absolute separation and an appropriate title, even if said formal compliance is carried out in the balance sheet of the annual accounts for the following year. This reserve will be unavailable for 5 years from 31 December of the fiscal year during which the reduction is applied.