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Practical Handbook for Companies 2021

Application of limiting the deductibility of financial expenses

Where the net financial expenses for a tax period of one year do not exceed EUR 1 million, they are tax deductible up to a limit of 30 per cent of the operating profit for the year.And when the tax period has a duration of less than a year, the amount of net financial expenses for the same tax deductible without this limit will be the result of multiplying 1 million euros by the corresponding proportion of the duration of the tax period with respect to the year.

Net financial expenses not deducted may be deducted in subsequent tax periods, together with those of the corresponding tax period, up to a limit of 30 per cent.In the event that the net financial expenses for the tax period do not reach the said limit, the difference between this and the net financial expenses for the tax period are added to the limit, with respect to the deduction in net financial expenses for the tax periods ending in the 5 years immediately thereafter, until the difference is deducted.

This does not apply to the 1 million euros, in so far that if the net financial expenses for a year does not reach that amount, the difference between 1 million euros and the net financial expense deducted in the tax period cannot be applied in future tax periods.However, the amount of 1 million euros can be reached with the net financial expenses for the tax period and with financial expenses pending deduction from previous tax periods up to that amount.

As regards the application of this limitation to entities taxed in accordance with the provisions of Article 43 of the LIS, Article 16.3 of the LIS establishes that the net financial expenses imputed to the shareholders of such entities shall be taken into account by them for the purposes of applying the 30 per cent limit.

Finally, in relation to the application of the limitation on the deductibility of financial expenses, article 16.5 of the LIS establishes that the financial expenses derived from debts intended for the acquisition of shares in the capital or equity of any type of entity shall be deductible up to the additional limit of 30 per cent of the operating profit of the entity that made the acquisition, without including in this operating profit that corresponding to any entity that merges with it in the 4 years following the acquisition, when the merger does not apply the special tax regime provided for in Chapter VII of Title VII of the LIS.These financial expenses will be taken into account, likewise, in the limit referred to in section 1 of this article.

Non-deductible financial expenses resulting from the application of the provisions of this section shall be deductible in subsequent tax periods within the limit provided for in Article 16(1) and (5) of the LIS.

The limit stipulated in this section will not be applied in the tax period in which are acquired shares in the capital or equity of entities if the purchase is financed with debt a maximum of 70 percent of the cost price.Likewise, this limit shall not apply in subsequent tax periods provided that the amount of this debt is reduced, from the time of acquisition, by at least the proportional part corresponding to each of the following 8 years, until the debt reaches 30 per cent of the acquisition price.