Skip to main content
Practical Handbook for Companies 2021

Requirements

Taxpayers who apply the capitalisation reserve are entitled to a reduction in their taxable income of 10 per cent of the amount of the increase in their own funds, provided that they meet the following requirements:

  1. The amount of the increase in the entity's own funds must be maintained for a period of 5 years from the end of the tax period to which this reduction corresponds, except for the existence of accounting losses in the entity.

    The amount of this increase shall be determined by the positive difference between the own funds existing at the end of the financial year, excluding the results of the financial year, and the own funds existing at the beginning of the financial year, excluding the results of the previous financial year, and excluding certain items.

    However, for the purposes of determining the aforementioned increase, shall not be taken into account as own funds at the beginning and end of the tax period:

    1. Contributions by partners.

    2. Increases in capital or equities due to offsetting of credits.

    3. Increases in equities due to operations with own stock or of restructuring.

    4. Legal or statutory reserves.

    5. The unavailable reserves set aside in accordance with the provisions of article 105 of the LIS and article 27 of Law 19/1994, of 6 July 1994, amending the Canary Islands Economic and Fiscal Regime.

    6. Equity that corresponds to an issue of compound financial instruments.

    7. Equity corresponding to variations in assets due to deferred tax derived from a decrease or increase in the tax rate of this type of lien.

    These items shall also not be taken into account in determining the maintenance of the increase in own funds in each tax period in which it becomes due.

    A tener en cuenta:

    The capitalisation reserve funded will be taken into account for the purposes of determining the increase in shareholders’ equity and maintaining this increase, in accordance with the provisions of Article 25.2 of the LIS.Therefore, the capitalisation reserve funded will form part of the equity existing at the start and the end of the year in the same way that the rest of items forming part of such funds have not excluded for the purposes of determining their increase and subsequent maintenance of the same.

  2. That a reserve be set aside for the amount of the reduction, which shall be shown in the balance sheet with absolute separation and appropriate title and shall not be available for the period provided for in the preceding paragraph.

    For these purposes, shall not be deemed to have been drawn down from the aforementioned reserve, in the following cases:

    1. When a partner or stockholder exercises his right to separate from the company.

    2. When the reserve is totally or partially eliminated as a result of transactions to which the special tax regime established in Chapter VII of Title VII of the LIS is applicable.

    3. When the company is obliged to use this reserve for legal reasons.

    Date on which the allocation to the capitalisation reserve is entered in the accounts

    Bearing in mind that only at the end of the tax period is it possible to know the increase in equity that has been made in that period, having therefore generated an increase in the company's reserves, the formal compliance relating to recording in the balance sheet a reserve classified as unavailable with absolute separation and separate title will be understood to be fulfilled provided that the formal allocation of this capitalisation reserve takes place within the period legally established in the commercial regulations for the approval of the annual accounts for the financial year corresponding to the tax period in which the reduction is applied.

    Example:

    Question:

    Company A, whose financial year runs from 1 January to 31 December, has experienced an increase in equity during the year 2021 and intends to apply the tax benefit of the capitalisation reserve in that year.In order to comply with the requirements of article 25 of the LIS, the question arises as to the date on which the capitalisation reserve must be accounted for in order to be able to apply the 10 per cent reduction in the tax base for the year 2021.

    Response:

    Company A may apply the reduction in the tax base for the tax period 2021 (provided that the entity's financial year coincides with the calendar year), to the extent that at 31 December 2021 there has been an increase in equity compared to that existing at 1 January 2021 in the terms defined in Article 25 of the LIS, and there has been an increase in reserves.Irrespective of the fact that the capitalisation reserve is not formally recorded, the reduction provided for in Article 25 of the LIS may be applied to the tax base for the 2021 tax period, and the period provided for in the company law for the approval of the annual accounts for 2021 may be used to reclassify the reserve corresponding to the capitalisation reserve, so that it appears in the balance sheet with absolute separation and appropriate title, although this formal compliance will be made in the balance sheet of the annual accounts for 2022 and not in the 2021 balance sheet.This reserve shall be unavailable for a period of 5 years from 31 December 2021.