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Practical Manual for Companies 2024.

Application of limiting the deductibility of financial expenses

1. General limit

Regulation: Article 16 (paragraphs 1, 2 and 4) LIS

Regarding the deductibility of financial expenses, the following limits are established:

  • Net financial expenses will be deductible up to a limit of 30 percent of the operating profit for the year.

  • In any case, net financial expenses for the tax period amounting to 1 million euros will be deductible.

Regarding the application of these limits, we can distinguish several assumptions:

a. Application of financial expenses from previous years

Net financial expenses that could not be deducted in the tax period due to exceed the limit 30 percent of operating profit, may be deducted in subsequent tax periods without time limit, together with those of the corresponding tax period, and with the limit of 30 percent referred to the tax period in which the deduction is applied.

b. Operating profit that has not determined the deductibility of financial expenses in a tax period

When the net financial expenses of the tax period are less than the limit 30 percent From the operating profit, all net financial expenses for said period may be deducted and, in addition, the difference between the amount of the limit resulting from this tax period and the net financial expenses generated in the same, will be added to the limit of 30 percent on the operating profit, constituting a new accumulated limit that will be applied in the tax periods that conclude in the five immediate and successive years, until said difference is deducted.

Therefore, when in the subsequent tax periods, always within the five-year period established by the regulations, the net financial expenses are greater than the 30 percent limit From the operating profit, net financial expenses may be deducted, in addition to the limit of the tax period itself and after this, up to the difference that comes from previous tax periods.

The same does not occur in the case where the Net financial expenses do not reach 1 million euros in the tax period, so the difference between 1 million euros and the net financial expense deducted in the tax period cannot be applied in future tax periods.

However, as established by the regulations, net financial expenses up to €1 million may be deductible in a given tax period. This amount can therefore be reached by including net financial expenses for the tax period and outstanding financial expenses from previous tax periods up to this amount.

Likewise, if there is an operating profit for a tax period that did not determine the deductibility of the net financial expense in that period, the difference between the two will be added to the limit of 30 percent of the operating profit for any of the tax periods that conclude in the following 5 successive years, constituting a joint limit that will be applied before the minimum limit of 1 million euros. Therefore, only after the net financial expenses for the tax period have exceeded this joint limit will the minimum limit of 1 million euros come into play.

c. Limit of 1 million euros

We can distinguish the following cases:

  • When the net financial expensesof a tax period do not exceed 1 million eurosThese will be fully tax deductible without being subject to the limit of 30 percent of the operating profit for the year.

  • When the net financial expenses of a tax period exceed 1 million euros, we must distinguish:

    • If the 30 percent limit is greater than 1 million euros, net financial expenses up to the amount of said limit will be deductible. In addition, net financial expenses that exceed the limit amount in that tax period may be deducted in subsequent tax periods.

    • If the 30 percent limit is less than 1 million euros, net financial expenses will be deductible up to the amount of 1 million euros.

  • When net financial expenses for a tax period are below the 30 percent threshold, the entire financial expenses will be deductible, regardless of whether the threshold exceeds €1 million.

If the duration of the tax period is less than a year, the amount of 1 million euros will be prorated according to the length of the period in relation to the year.

2. Economic Interest Groups (EIGs) and Temporary Business Associations (UTE)

Regulation: Article 16.3 LIS

Members of Economic Interest Groups (EIGs) and Temporary Business Associations (UTEs) that pay taxes in accordance with Article 43 of the LIS must take into account the net financial expenses charged to them by said companies for the purposes of applying the limit provided for in Article 16 of the LIS.

3. Acquisition of equity shares or equity

Regulation: Article 16.5 LIS

Financial expenses arising from debts destined for the acquisition of equity shares or equity of any type of entities will be deducted with the additional limit of 30 percent of the operating profit of the entity that made said acquisition, without including in said operating profit the profit corresponding to any entity that merges with it in the 4 years following said 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 also be taken into account within the limits referred to in Article 16.1 of the LIS.

The non-deductible financial expenses resulting from the application of the provisions of the previous paragraph will be deductible in subsequent tax periods with the limit provided for in said section and in article 16.1 of the LIS.

He The limit provided for in the first paragraph shall not apply In the tax period in which the shares in the capital or equity of entities are acquired if the acquisition is financed with debt, up to 70 percent of the acquisition price. Furthermore, this limit will not apply in subsequent tax periods provided that the amount of that debt is reduced, from the time of acquisition, by at least the proportional amount corresponding to each of the following eight years, until the debt reaches 30 percent of the acquisition price.