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Practical Manual of Companies 2021.

Requirements

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

  1. That the amount of the increase in the entity's own funds be 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 said increase will be determined by the positive difference between the own funds existing at the end of the year without including the results of the year, and the own funds existing at the beginning of the year, without including the results of the previous year, and without taking into account certain concepts.

    However, for the purposes of determining the aforementioned increase, will 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 that are provided by application of the provisions of article 105 of the LIS and article 27 of Law 19/1994, of July 6, modifying 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 to determine the maintenance of the increase in own funds in each tax period in which it is payable.

    Keep in mind:

    The capitalization reserve provided will be taken into account for the purposes of determining the increase in own funds and the maintenance of such increase, in accordance with as indicated in article 25.2 of the LIS . Therefore, the capitalization reserve provided will be part of the own funds existing at the beginning and at the end of the year in the same way as the rest of the items that make up such funds that are not excluded for the purposes of determining its increase and subsequent maintenance thereof.

  2. That a reserve be established for the amount of the reduction , which must appear in 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 understood to have drawn down 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 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 applies.

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

    Accounting date of the capitalization reserve provision

    Taking into account that only at the end of the tax period is it possible to know the increase in own funds that has been made in said period, having therefore generated an increase in the entity's reserves, the formal compliance relating to recording in the balance sheet a reserve qualified as unavailable with absolute separation and separate title will be deemed fulfilled provided that the formal allocation of said reserve of capitalization 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 own funds 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 what date the allocation of the capitalization reserve must be accounted for, in order to be able to apply the 10 percent reduction in the tax base corresponding to the 2021 financial year.

    Answer:

    Company "A" may apply the reduction in the tax base for the 2021 tax period (provided that the financial year of the entity coincides with the calendar year), to the extent that as of December 31, 2021 there has been an increase of own funds with respect 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 capitalization 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 deadline provided for in the commercial standard for the approval of the annual accounts of the fiscal year 2021 to reclassify the reserve corresponding to the capitalization reserve, so that it appears in the balance sheet with absolute separation and appropriate title, although said formal compliance is carried out in the balance sheet of the annual accounts for fiscal year 2022 and not in the of 2021. This reservation will be unavailable for a period of 5 years starting December 31, 2021.