Small businesses, those whose net turnover is less than 10 million euros, can apply a series of tax incentives that will allow them to reduce their taxation in Corporate Income Tax.
Now that we're in the midst of the corporate tax return filing season, we'd like to remind you that if your company is small, you're entitled to some attractive incentives (such as accelerated depreciation for job creation and double depreciation). We'll explain what these incentives are and the requirements for them.
Consideration of a small business
We remind you that for your company to qualify as a small-sized enterprise (SSE) and be eligible for the applicable tax incentives in the Corporate Income Tax return (freedom of depreciation for job creation, double depreciation, etc.), your turnover in the previous year must have been less than ten million euros (if you are part of a group, to calculate this figure you must take into account the consolidated data of the group).
However, even if a company's turnover exceeds ten million euros in a given year (and it ceases to be an SME in the following year), it may still be able to benefit from these incentives for three more years. This will occur if, in the year in which it exceeds this figure and in the two previous years, it has met the requirements to be classified as an SME.
The regime can also be extended if the limit of the net turnover amount (INCN) is exceeded when a protected operation of the business restructuring regime is carried out, when the entities that carry out the operation were ERD in the period in which it was carried out and in the 2 previous years.
- Attention. If you have started an economic activity, the INCN to be taken into account is that corresponding to the time in which the effective activity has been carried out, amounting to a year.
If the entity is part of a group of companies, it may apply the ERD regime if the combined net turnover is less than €10,000,000. Transactions between entities within the group are not taken into account for this calculation.
What components need to be considered to determine the INCN?
Positive components:
- Sales and provision of services derived from the ordinary activity of the company.
- The delivery of goods and provision of services by the company in exchange for non-monetary assets or as consideration for services that represent expenses for it.
- The portion of the subsidies granted based on the units of product sold and which forms part of its sale price.
Negative components:
- Sales returns.
- Rebates on sales or services.
- Trade discounts applied to income included in the annual turnover figure.
Tax incentives
The tax incentives are as follows:
- Freedom of amortization for job-creating investments, up to a maximum of €120,000 for each man/year of increased staff
- Accelerated amortization
- Leveling reserve
- Losses due to impairment of receivables from insolvent debtors, up to 1% of existing debtors at the end of the tax period
- Deduction of the recovery of the cost of the asset included in the lease payments made, when movable or immovable property is acquired under a financial lease, with the limit of the maximum coefficient of the tables multiplied by 3.
- Freedom of depreciation for investments in tangible fixed assets and real estate investments that generate employment.
New tangible fixed assets and real estate investments, used for economic activities, may be freely depreciated provided that, during the 24 months following the start of the tax period in which the acquired assets become operational, the company's total average workforce increases compared to the average workforce of the previous 12 months, and this increase is maintained for an additional period of another 24 months.
The amount of the investment that may benefit from the free amortization regime will be the result of multiplying the figure of 120,000 euros by the aforementioned increase calculated with two decimal places.
For the calculation of the company's total average workforce and its increase, the employed persons will be taken into account, in accordance with the terms established by labor legislation, considering the contracted working hours in relation to the full working hours.
The freedom of depreciation will be applicable from the start of operation of the elements that may be eligible for it.
The provisions of this regime will also apply to items ordered under a construction contract signed during the tax period, provided they are made available within 12 months of the contract's completion. It will also apply to tangible fixed assets and investment properties constructed by the company itself.
- Attention. If accelerated depreciation with job creation is applied, and the company carries out more than one economic activity, it is not necessary for the acquired asset and the increase in employment to occur in the same activity, since the calculation of job creation is done at the taxpayer level and not at the activity level.
If the obligation to increase or maintain the workforce is not met, the full amount of tax that would have been due on the excess deduction, plus applicable late payment interest, must be paid. The full amount of tax and late payment interest must be paid together with the self-assessment for the tax period in which the obligation was not met.
- Attention. New tangible fixed assets and real estate investments, used in economic activities, subject to a financial lease agreement and made available to the company during the tax period in which it is considered a small business, may enjoy freedom of depreciation provided that the purchase option is exercised and the requirements established regarding the increase and maintenance of employment are met.
- Accelerated depreciation for tangible fixed assets, real estate investments and intangible assets without job maintenance.
New tangible fixed assets and real estate investments, as well as intangible fixed assets, both related to economic activities, made available to the taxpayer in the tax period in which it is considered a small business, may be amortized based on the coefficient resulting from multiplying by 2 the maximum linear amortization coefficient provided for in the officially approved amortization tables.
The Directorate General of Taxes considers, with respect to intangible fixed assets, classified commercially as assets with an indefinite useful life, referred to in article 12.2 of the LIS, as well as in the case of goodwill, 150 percent of the amount resulting from applying the maximum tax amortization of 5 percent to them may be deducted (DGT V0540-20).
- Attention. To apply accelerated depreciation, the asset must have a coefficient in the tables, which does not occur, for example, in the adaptation works of a leased premises (DGT consultation V1957-12).
- Losses due to impairment of receivables from potential debtor insolvencies
The requirements for impairment losses to be deductible are as follows:
1. The entity must be considered to be of small size in the tax period in which the loss is deductible.
Attention. If a taxpayer loses its status as a Small and Medium-Sized Enterprise (SMEs) in a given year, the accumulated balance of the overall impairment loss from insolvency proceedings is reversed in stages as the entity records its new impairment losses on an individual basis. In other words, new impairment losses will not be tax-deductible until the accumulated balance of the overall impairment loss recorded in previous years is exhausted.
2. The amount of the provision cannot exceed 1% of the balance of existing debtors at the end of the tax period.
For these purposes, the balance does not include debtors on whom the loss due to impairment of credits for insolvencies established in article 13.1 of the law of this tax has been recognized and those others whose losses due to impairment are not deductible according to the provisions of said article.
3. The balance of the provision made by this method at the close of the tax period may not exceed 1% of the aforementioned debtors existing at the conclusion of the same.
4. Taxpayers who meet the conditions of Article 101 of the LIS in the tax periods beginning in 2021 and 2022 may deduct, in those periods, losses due to impairment of receivables arising from possible insolvencies of debtors when, at the time of accrual of the Tax, the period that has elapsed since the due date of the obligation referred to in point a) of paragraph 1 of Article 13 of said Law is three months.
- Taxable base leveling reserve
Only entities that qualify as small businesses (ERD) and apply the general tax rate can apply this incentive (newly created entities cannot apply this tax incentive as they are taxed at a lower rate than the general rate in the first two years in which they obtain profits)
It consists of reducing the taxable base of the year by a maximum of 10 percent of its amount, with a quantitative limit of up to €1,000,000.
If a negative taxable income is generated in the five tax years following the establishment of this reserve, it must be reduced by the amount of the reserve. If five years elapse and the reserve has not been fully applied because there were no negative taxable income figures during that period, the remaining amount is added to the taxable income of the final tax year.
The reduced amount must be used to create a non-distributable reserve from the profits of the year in which the base is reduced. If there are insufficient profits in the year of the reduction, the reserve must be established in subsequent years as soon as possible (the reserve will only be available when the partner exercises their right to withdraw from the company, when it is eliminated, in whole or in part, as a result of corporate restructuring operations, or when a legal provision so provides).
Please note that if you applied the equalization reserve in 2016 and still have an outstanding balance from that year, you must make the corresponding positive adjustment for the entire balance this year, as the five-year period stipulated by law for repaying the tax incentive will have expired. The reserve you allocated in that year will then become available.
You can contact this professional office for any questions or clarifications you may have.
Warm regards,
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A Àmbit Assessor, SL has 40 years dedicated to the tax, comptable and labor consultancy of the Pime.
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