How to reduce the tax bill with capitalisation reserve

From the changes introduced by the new Law 27/2014 on Corporation Tax ("LIS" [Ley de Impuesto sobre Sociedades]), so-called Capitalisation Reserve is among the few remaining mechanisms that reduce the effective taxation in Corporation Tax. It is a tax incentive that consists of taxable base’s reduction by a maximum of 10% of the amount of increase in equity.


What does it entail?


The capitalisation reserve allows the part of the profit that is allocated to the creation of a restricted reserve to be excluded from taxation. This tax incentive boosts business capitalisation through the increase of net worth. Furthermore, the requirement to invest in a concrete type of assets no longer exists (as demanded in the previous deduction by reinvestment in excess profits).

This means reducing the type of rate effective in Corporation Tax, in a similar way to former deductions, which were practically entirely eliminated in the last Government’s tax reform. The difference is that the reduction by capitalisation reserve is applied to the taxable base. On the other hand, the levelling reserve for SMEs produces a deferral in taxation.

The creation of this tax incentive boosts business capitalisation through the increase of net worth; therefore companies anticipating application ought to account for it in the Corporation Tax Expenditure forecast made at financial year-end 2015.

What are the requirements for the reduction in the taxable base?


Taxpayers will be able to reduce their taxable base by up to 10% of the amount of increase in equity of the organisation, provided that the following requirements are met:

  • That the amount of increase in company’s equity is maintained for 5 years after the financial year to which the reduction corresponds, except in the existence of accounting losses in the company.

  • That a reserve, restricted by the amount of the reduction, is recorded. It must figure separately and recognizable in the balance during the 5-year term.

In the event that the taxable income is not sufficient to apply the reduction, the excess can be reduced from the taxable base in the two subsequent years, together with the reduction of the same financial year and with the same limit.

In the case of noncompliance with the established requirements, the reduced quantities must be regulated with the corresponding interest on arrears.


At what moment must the reserve be recorded?


For those companies in which the financial year coincides with the calendar year, the reduction on taxable base for the tax period 2015 can be applied.

Nowadays, in times where the corporations are immersed in the formulation and approval of the Annual Accounts, including the distribution of the financial year 2015, and finalizing Corporation Tax calculations that will be introduced as of July 1, 2016, it’s time to reckon up, to check if this tax incentive can be applied and can achieve a 2.5 point reduction in the tax bill. If you have got to this point and continue to have doubts on how to reduce your tax bill, contact us at fiscal@ivc.es.


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