A draft tax bill that should be issued together with the Spanish 2013 General Budget Law has been recently made public. The text will most likely bring congressional debate well into the end of 2012. Hereby follows a summary of the most relevant amendments to Spanish tax legislation therein included:
I. Tax (and accounting) step-up of balance sheet assets
Aimed at facilitating both internal financing and access to capital markets, an optional updating/increase in value of fixed assets, real estate properties and financial leasing is introduced.
Such step-up, which pursues the adjustment of the value for tax (and accounting) purposes of the mentioned assets to their real (fair market) value, would have to be carried out on the basis of the taxpayer’s balance sheet approved subsequent to the introduction of this measure (generally, balances closed at 31 December 2012, i.e. it is a one-shot opportunity). Further, the step-up amount will be carried to a special ad hoc equity reserve (so-called “revaluation reserve”).
A 5% flat tax of the amount of the said reserve would be triggered. This 5% tax cost will not be considered as a tax deductible expense and will be due on the date established for the tax return of the taxpayer corresponding to the “updated” balance sheet.
The step-up will therefore be voluntary and capped to the market value of the assets. Additionally, the revaluation will have to refer to all of the qualifying assets and will include their corresponding depreciations, except in the case of real estate assets, in respect of which the taxpayer can elect to carry out the step-up on an individual basis (i.e. on a property-by-property basis). Moreover, the assets object of this step-up shall only be depreciated as from the first fiscal year initiated on or after 1 January 2015.
Also to be highlighted is that the application of the mentioned “revaluation reserve” is subject to certain restrictions, namely, the prior approval by the Spanish tax authorities subsequent to which it could be used to (i) offset accounting losses or (ii) carry out a share capital increase of the company. In order to make an alternative use of the reserve, e.g. free dividend distribution, a ten year period would have to elapse as from the closing of the “updated” balance sheet.
Comment - In our view, this measure could have a relevant impact on the final effective taxation of the assets to be revaluated (e.g. real estate properties). A case-by-case study should be performed in order to identify its effectiveness in terms of future taxation considering facts such as expected divestment, prospect of further increase in value in the future, depreciation impact, etc.
II. Corporate Income Tax (“CIT”)
A. Cap on tax deductible depreciations
For fiscal years starting in 2013 and 2014 (i.e. it is a temporary measure), the tax depreciation of fixed assets, intangible assets and real estate properties will be capped at 70% of the rate corresponding to the depreciation method applied by the relevant company.
As a consequence of the introduction of this limitation, deadlines applicable to the depreciation tax facility will be increased.
This restrictive measure will only be applicable to large companies (i.e. companies with a turnover exceeding €10 million).
B. Extension of reduced CIT rates for certain small and medium companies
For tax periods beginning in 2009, 2010, 2011 and 2012, companies with an annual turnover not exceeding €5 million and whose average number of employees is below 25 and maintained over time, are currently subject to a CIT reduced rate of 20% for annual profits not exceeding €300K and to 25% for annual profits in excess of €300K.
The draft tax bill herein summarized extends the tax periods in which these reduced tax rates apply to those commencing in 2013.
III. Personal Income Tax
Capital gains taxation stemming from assets held for no more than one-year
Effective as from 1 January 2013, capital gains derived from transfers of assets held by individual taxpayers for no more than 1 year will be included in the general income basket (i.e. currently capital gains are included in the savings income basket) and will be taxed accordingly (i.e. at the progressive general tax rate scale that goes from 24.75% to 52%, instead of being subject to the current progressive savings income tax rates, which general rate stands at 21% -maximum of 27% for fiscal years 2012 and 2013-).
Comment – Since under Spanish tax law capital gains may be offset by capital losses obtained in previous years (considering a 4 year statute of limitations period), this measure would be detrimental to those individuals with available previous years’ losses obtaining short-term capital gains in 2013 (deriving from assets held over a period not exceeding one year).
In other words, losses obtained in recent years may exclusively be used to offset other long-term capital gains (more than one year). Further, this measure, which is said to fight against speculative transactions (e.g. stock market trading), is in our view “cosmetically” oriented in the context of the current economics of Spain. Among others, it does not affect transactions carried out by special purpose vehicles (including funds, etc.), which are the ones that in practice carry out the bulk of speculative transactions, nor does it address other type of income (e.g. dividends, interest), which may also stem from a speculative transaction, there is a flagrant inconsistency/discrimination with respect to the non-residents capital gains income taxation which is still set at a fixed rate of 19% (21% for fiscal years for 2012 and 2013), etc. What is more, a few open questions exist around this amendment, e.g. inexistence of related anti-abuse measures. All in all, we will need to wait for the final approved text of the bill to conclude if potential structuring opportunities could be available to reduce the capital gain taxation on short term capital gains (again, which could be subject to a tax rate of up to 52%).
Other tax measures also included in the draft tax bill relate to the employment in kind income related to the use of a residence, whose tax benefit will be abolished going forward, the elimination of the tax credit concerning the acquisition/renovation of primary residence for individuals, the extension of the Net Wealth Tax to tax year 2013 (subject to the specific regulation of the Spanish region where the individual is tax resident), etc.