Legal double taxation, which occurs when income is taxed in two different states, can significantly affect a company’s profitability. Fortunately, in Spain, there is a mechanism to avoid this problem: the corporate income tax double taxation deduction.
Understanding the legal double taxation deduction:
The deduction for legal double taxation in Spanish corporate income tax is designed to prevent a company from paying tax twice on the same income, specifically on dividends received from foreign companies.
If your company has received dividends from foreign companies and you have paid taxes in Spain, you may be able to apply a double taxation deduction in your corporate income tax.
It seeks to correct legal double taxation, i.e. the fact that income earned by one taxpayer is taxed in two different States.
Thus, Article 31 of the LIS states that when the taxable income of the taxpayer includes positive income obtained and taxed abroad, the lesser of the following two amounts shall be deducted from the gross tax payable:
- The actual amount paid abroad in respect of taxes of the same or a similar nature to this tax, although:
- Taxes not paid as a result of an exemption, rebate or any other tax benefit may not be deducted.
- In cases where a double taxation avoidance treaty is applicable, the deduction may not exceed the tax resulting from such a treaty.
- The amount of the full tax liability that would be payable in Spain on the aforementioned income if it had been obtained in Spanish territory.
Amounts that could not be applied due to insufficient tax liability may be deducted in subsequent tax periods, without any time limit being set.
Basically, the deduction would be the lesser of the amount withheld abroad or the amount resulting from applying the Spanish tax rate to the calculation base.
Conclusion:
The deduction for legal double taxation in Spanish corporate income tax is a valuable tool for companies operating internationally. By understanding how this mechanism works and following best practices for its application, companies can optimise their tax benefits and ensure compliance with their tax obligations. If you need help with your corporate tax return and the application of this deduction, do not hesitate to seek professional advice. With careful planning and the right knowledge, you can maximise the benefits of this deduction and strengthen your company’s financial health.
