The Central Administrative Economic Court (TEAC) has just agreed with the Directorate General of Taxation (DGT) in a technical dispute that the authority has been feuding with the tax authority for more than a year. The focus of the discussion was about corporate tax and how a provisional dividend was calculated for a company that wanted to take advantage of the capitalization reserve in the year of distribution.
The spirit of the regulations seeks to provide tax incentives for a company to use the profits it receives in a fiscal year to boost its capital by increasing reserves and not paying dividends. Thus, the law allows the company to deduct up to 10% of the excess reserves in a given year. The dispute was over whether the dividend paid in that year should reduce that increase in reserves to which the discount is applied. At first, taxes realized that to account for own money—a necessary measure to take advantage of the stimulus—it was not necessary to calculate current earnings. The IRS, on the other hand, has argued that it should be counted for the account. TEAC states, in a firm resolution, that the distribution does not prejudice the capitalization reserve in that year.
The TEAC decision, Pelayo Ora, partner in the corporate tax district of KPMG Abogados, and Salvador Ruiz Galud, managing partner of Equipo Economico’s financial district, clarifies the doctrines and dispels doubts that the tax agency had sowed. The resolution, confirming the pre-tax criteria, indicates that interim dividends are detrimental to the capital reserve to be introduced in the following year, and not the incentive for the exercise of the distribution itself, as they explain in detail. “The effect is only temporary, but the taxpayer retains the possibility of temporary dividend without prejudice to the capital reserve for the same year,” adds Ruiz Galud.
In practice, for example, the capitalization reserve account for 2022 will not be affected by interim profits distributed this year to the results of the same year. In other words, the 2022 reserve will only be affected by the dividend for fiscal year 2021, which in this particular case will usually take place in June of this fiscal year, when companies hold their own meetings.
These are not minor details, Ruiz Galud continues, because they give some oxygen to the companies. “Partners will be able to take profits on the account, for example because they need that liquidity for another company, without harming the company by not being restricted or adapted when it comes to utilizing the capital reserve.”
However, Ruiz Galud adds, the interim dividend distributed in 2022 will reduce the capitalization reserve due to be presented in 2023 on the results of the 2022 fiscal year, “because the decision on its distribution will have already been made on the part of the previous year”. It must be remembered that this incentive requires the provision of reserves, and therefore the distribution of profits prevents the benefit of the tax advantage.
If a company starts a year with reserves of 100 million and ends with reserves of 200 million, 10% of those 100 million (10 million) may be deducted, regardless of whether it paid a dividend in that year. If you pay 50 million to shareholders, and as a result, the reserves increase in the following year by only 50 million, in that second year you can only deduct 5 million, 10% of 50.
The court’s decision, Ora highlights, is in line with the tendency to penalize debt, and in parallel with financially stimulating corporate money. Specifically, Adolfo Zunzunegui, Partner in the Tax District at Allen & Overy, adds that it is not an increase in private funds derived from profits made in the same year, but an increase in private funds derived from profits obtained in the previous year. . For this reason, interim dividends should not be calculated on the result of the year itself, “which is nothing more than an early distribution of this”, for the purpose of determining the variance in own funds at the end and beginning of the year.
The President of the State Tax Inspectors Association, Julio Rances Perez-Boga, celebrates the TEAC’s decision and standardization on such a “complex” issue. He also throws the mantle on the IRS, which has gone to court over its feud with the Tributes. He explains that the reason for this is that based on the literal wording of Article 25 of the Corporate Tax Law, it can be understood that active temporary dividends must be computed for calculating own funds at the end of the financial year and, therefore, computed when calculating the increase in own funds which forms the basis for calculating capitalization reserve.
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