After this fateful year 2020 is over, Spanish companies are now facing the close of the fiscal year. They prepare their annual accounts and calculate their corporate tax (IS). This year-end will be complicated by the exceptional circumstances caused by the pandemic, let’s look at some critical points.
In terms of write-offs, many companies had to close during incarceration and currently some of them have opened, closed, reopened and closed again in line with the evolution of the mitigation measures, to avoid the spread of the coronavirus. What happens to the depreciation of the assets during the periods when the businesses were closed? Will they be considered a deductible expense if not used or worn out? Will they be deductible during the periods when the business has not generated income? Should we adjust asset depreciation during business close periods?
As for deductible expenses, due to the well-known clear correlation between expenses and income, when the company does not generate income, expenses are not deductible, which is something the AEAT is very clear about in the case of inactive companies that are systematically denied deductibility for expenses, how small too. So what happens to the costs incurred despite being in a closing situation? Will they be deductible in the IS? Will we have to adjust them as a permanent difference? What criteria will be used with regard to the costs Covid incurs for the closures? Non-deductible costs and fine for those who do not? Add to this the costs generated by failure to comply with the ERTE bonuses for subsequent layoffs (the known non-deductible costs for ‘acts contrary to the legal system’ of Section 15 of the IS Act).
Another aspect to consider is the surplus assets. Many businesses keep blind for months, and some are still completely or partially closed, especially those related to tourism. In this case, we have to decide whether the assets of the company are still related to an economic activity (which does not exist because of the closure) or whether they will be treated as assets unrelated to the activity. If this happened, we would introduce what is called ‘regulatory capital’, which is the capital that occurs when more than 50% of an entity’s assets are unaffected by an economic activity. The definition of a portfolio company changes depending on the tax in question. The IS according to quarterly balance sheets.
The wealth tax based on compliance for 90 days in the financial year of the asset conditions. Currently, there are still companies that keep production centers, shops, restaurants or hotels closed due to a lack of demand, making them viable. The “surplus equity” causes the loss of tax incentives in the IS (tax rates of 15%, ERD incentives, dividend exemption and negative tax base offset for listing some).
It would also be excluded from being considered a family business and therefore its partners would have to pay its value in the estate tax or, in the case of transfer by inheritance or gift, the 95% reduction in the loss of the estate tax.
And the decision must be made for the following months of June and July in which we will present the IS tax return, the personal income tax (self-employed persons) and the wealth tax. On the contrary, the AEAT is given 4 years to inspect us and verify that we have done everything correctly.
David Jiménez, Raúl Marset and Albert Sagués, partners of RSM Spain