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Practical Manual of Companies 2022.

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 of their own funds, provided they meet the following requirements:

  1. That the amount of the increase in the own funds of the entity be maintained for a term of 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 the provisions of 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 related to recording a reserve in the balance sheet classified as unavailable with absolute separation and separate title will be deemed fulfilled provided that the formal allocation of said capitalization reserve occurs within the period legally provided for in commercial regulations for the approval of the annual accounts of the year corresponding to the tax period in which the reduction is applied.

    Example:

    Ask:

    Company "A" whose financial year extends from January 1 to December 31, has experienced an increase in its own funds during the year 2022 and intends to apply the benefit in said year tax of the capitalization reserve. In order to comply with the requirements mentioned in article 25 of the LIS, it is proposed on what date the provision 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 year 2022 .

    Answer:

    Company "A" may apply the reduction in the tax base for the tax period 2022 (provided that the financial year of the entity coincides with the calendar year), to the extent that at 31 December 2022 there has been an increase in own funds with respect to those existing on January 1, 2022 in the terms defined in the 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 tax period 2022 , subject to the deadline provided for in the commercial standard for the approval of the annual accounts for the year 2022 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 the year 2023 and not in that of 2022 . This reservation will be unavailable for a period of 5 years from December 31, 2022 .