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Practical Manual for Companies 2021.

Requirements

Taxpayers applying the capitalization reserve will be entitled to a reduction in the tax base of 10 percent of the amount of the increase in their equity, provided they meet the following requirements:

  1. That the amount of the increase in the entity's equity is maintained for a period of 5 years from the close of the tax period to which this reduction corresponds, except for the existence of accounting losses in the entity.

    The amount of such increase will be determined by the positive difference between the existing equity at the end of the financial year, excluding the results of the same, and the existing equity at the beginning of the same, excluding the results of the previous financial year, and without taking into account certain concepts.

    However, for the purposes of determining the aforementioned increase, will not be taken into account as equity 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. Unavailable reserves that are created by applying the provisions of article 105 of the LIS and article 27 of Law 19/1994, of July 6, amending the Economic and Fiscal Regime of the Canary Islands.

    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 will not be taken into account when determining the maintenance of the increase in equity in each tax period in which it is required.

    Keep in mind:

    The capitalization reserve provided will be taken into account for the purposes of determining the increase in equity and the maintenance of such increase, in accordance with the provisions of article 25.2 of the LIS . Therefore, the capitalisation reserve provided will form part of the equity existing at the beginning and end of the financial year in the same way as the rest of the items comprising such funds that are not excluded for the purposes of determining their increase and subsequent maintenance.

  2. That a reserve be set aside for the amount of the reduction , which must appear on the balance sheet with absolute separation and appropriate title and will be unavailable during the period provided for in the previous paragraph.

    For these purposes, will not be deemed to have used the aforementioned reservation , in the following cases:

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

    2. When the reserve is eliminated, totally or partially, as a result of operations 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 of accounting for the allocation of the capitalization reserve

    Taking into account that only at the end of the tax period is it possible to know the increase in equity that has been made in said period, having therefore generated an increase in the entity's reserves, the formal compliance relative to recording in the balance sheet a reserve classified as unavailable with absolute separation and separate title will be deemed fulfilled provided that the formal provision of said capitalization reserve occurs within the period legally provided for in commercial regulations for the approval of the annual accounts for the year corresponding to the tax period in which the reduction is applied.

    Example:

    Ask:

    Company "A", whose financial year runs from January 1 to December 31, has experienced an increase in its equity during 2021 and intends to apply the tax benefit of the capitalization reserve in said year. In order to comply with the requirements mentioned in article 25 of the LIS, the question arises as to the date on which the capitalization reserve should be recorded in order to apply the 10 percent reduction in the tax base corresponding to the 2021 fiscal year.

    Answer:

    Company "A" may apply the reduction in the tax base for the 2021 tax period (provided that the entity's financial year coincides with the calendar year), to the extent that as of December 31, 2021, there has been an increase in equity compared to those existing as of January 1, 2021 in the terms defined in article 25 of the LIS, and there has been an increase in reserves. Regardless of whether the capitalisation reserve is not formally registered, the reduction provided for in article 25 of the LIS may be applied to the tax base for the 2021 tax period, with the period provided for in the commercial regulations for the approval of the annual accounts for the 2021 financial year being available to reclassify the reserve corresponding to the capitalisation reserve, so that it appears on the balance sheet with absolute separation and appropriate title, even if said formal compliance is carried out in the balance sheet of the annual accounts for the 2022 financial year and not in that of 2021. This reserve will be unavailable for a period of 5 years from December 31, 2021.