Limitation on deductibility of financial charges from 2024 onwards
On 1 January 2024, the reduction of the limit on the deduction of financial expenses introduced in Law 27/2014, on Corporate Income Tax (LIS) by Law 13/2023, of 24 May, which adapts Spanish legislation to the EU Directive on protection against abusive tax planning in the EU, will come into force.
To understand this modification, it is worth reviewing the regulation that will be in force until 31 December, according to which:
"Net financial expenses will be deductible with a limit of 30% of the operating profit for the year".
For these purposes:
Net financial expenses (NFO) shall mean the excess of financial expenses over income derived from the transfer to third parties of own capital, excluding those expenses that are non-deductible because they relate to transactions carried out with tax havens and with group entities for the acquisition of holdings or contributions in the capital to other group entities that do not respond to valid economic motives.
Operating profit (OP) shall be determined on the basis of the operating profit or loss in the profit and loss account for the year:
- Eliminating:
- depreciation of fixed assets,the allocation of grants for non-financial fixed assets and others, impairment and gain or loss on disposal of fixed assets; and
+ Adding:
- financial income corresponding to participations in entities in which the direct or indirect participation percentage is at least 5%, unless such participations have been acquired with debts whose financial expenses are not deductible.
In any case, net financial expenses for the tax period amounting to EUR 1 million are deductible.
Thus:
- If the GFN exceed the limit of 30% of the BO.
GFNs which have not been deducted may be deducted in the immediate and subsequent tax periods, together with those of the corresponding tax period, and with the same limit of 30%.
- If GFNs do not exceed the limit of 30% of BO.
The difference between the aforementioned limit and the GFN of the tax period will be added to the limit of the tax periods ending in the 5 years immediately following, until this difference is deducted.
As of 1/1/2024, "income, expenses or revenues that have not been included in the tax base of this tax" are excluded from the operating profit.
In other words, all those dividends, income derived from the transfer of shares or holdings and income obtained abroad through a permanent establishment that are exempt from taxation (articles 21 and 22 of the LIS) are not added to the operating profit, so the limit for financial expenses is reduced.
However, insofar as the limit not applied in one year can be applied in the following 5 years, it would be possible to consider bringing forward the dividend distribution planned for 2024 to 2023, so that the excess of 30% of the BO over the GFN generated in 2023 could be added to the limit for 2024.
Finally, expenses included in the operating result that are not deductible and therefore not included in the tax base will not affect the calculation of the financial expenses limit.
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