Tax incentives for small enterprises

Entities that meet the conditions established in article 101 of the LIS in the tax period and apply the tax rate provided for in the first paragraph of section 1 of article 29 thereof, may reduce their positive tax base by up to 10% of its amount.

In any case, the reduction may not exceed the amount of 1 million euros.

If the tax period lasts less than one year, the amount of the reduction may not exceed the result of multiplying 1 million euros by the proportion between the duration of the tax period and the year.

This reduction will be taken into account for the purposes of determining the fractional payments referred to in section 3 of article 40 of the LIS.

The taxpayer must set aside a reserve for the amount of the reduction referred to in section 1 of article 105 of the LIS, which will not be available until the tax period in which the amounts referred to in section 2 of said article are added to the entity's tax base.

The reserve must be provided against the positive results of the year in which the reduction in tax base is made. If this reserve cannot be set up, the reduction shall be dependent upon the reserve being made against the first profits earned in subsequent years.

For these purposes, it will not be understood that this reserve has been used 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 entity must apply the reserve by virtue of a legal obligation.

The amounts allocated to the provision of this reserve may not be applied simultaneously to the fulfilment of the capitalisation reserve established in article 25 of the LIS, nor of the Reserve for Investments in the Canary Islands provided for in article 27 of Law 19/1994, of July 6, amending the Economic and Fiscal Regime of the Canary Islands.

One of the requirements established by article 105 of the LIS in order to reduce the tax base, in accordance with its section 3, is that a reserve be set aside for the amount of the reduction, which will be unavailable until the tax period in which the addition to the tax base of the entity of the reduced amounts occurs. The reserve, as expressly established, must be provided against the positive results of the year in which the reduction in tax base is made. If this reserve cannot be set up, the reduction shall be dependent upon the reserve being made against the first profits earned in subsequent years.

Article 273 of the consolidated text of the Capital Companies Act, approved by Royal Legislative Decree 1/2010, of July 2, establishes in its section 1 that the general meeting will resolve on the application of the result of the year in accordance with the approved balance sheet. Thus, the tax levelling reserve shall be set up when the distribution of profit is determined in accordance with prevailing legislation.

Article 105.1 of the LIS establishes that entities that meet the conditions established in article 101 of the LIS in the tax period and apply the tax rate provided for in the first paragraph of section 1 of article 29 of said Law, may reduce their positive tax base by up to 10 percent of its amount. Thus, one of the requirements established by article 105 of the LIS, in order to reduce the tax base, in accordance with its section 1, is that the taxpayer pays taxes at the tax rate provided for in the first paragraph of section 1 of article 29 of the LIS.

In this regard, Article 29.1 of the LIS establishes in its first paragraph that the general tax rate for taxpayers of this Tax will be 25 percent. And in the second paragraph it states that, however, newly created entities that carry out economic activities will be taxed, in the first tax period in which the taxable base is positive and in the following one, at a rate of 15 percent.

Consequently, to the extent that the entity has not paid taxes at the tax rate provided for in the first paragraph of section 1 of article 29 of the LIS, but rather at the tax rate of 15 percent regulated in the second paragraph and following of said section, it will not be able to reduce its tax base in the terms established in article 105 of the LIS.

The amounts that entities have reduced from their tax base in accordance with the provisions of section 1 of article 105 of the LIS , will be added to the tax base of the tax periods that conclude in the 5 years immediately following the end of the tax period in which said reduction is made, provided that the taxpayer has a negative tax base, and up to the amount thereof.

The remaining amount will be added to the taxable base of the tax period corresponding to the date of completion of the aforementioned period.