Losses and Taxation

“Losing” is not always the worst option. When we plan our income tax we should look for any positive impact on income. One of these impacts is the use of patrimonial losses, to reduce the tax bill.

The Income Tax Act defines profits and losses as any variation in the taxpayer’s equity. Excluding the division of the common property, the dissolution of the community of property or the community of goods. However, not all profits and losses are taxable, as we will see in this paper.

When is there no capital gain or loss?

In the cases indicated below, for income tax purposes, it is not considered that an asset alteration may exist:

• Reduction of capital by amortization of participations.
• Profitable transfers due to the death of the taxpayer.

Profitable transfers of companies,  happen when the following requirements are met:

1. individual company or professional business;

2. the transmission is made in favor of the spouse, descendants or adopted children;

3. the transferor is 65 years of age or older, or is incapacitated or severely disabled; and

4. the transferor ceases to exercise management functions and to receive remuneration for them.

The acquirer must maintain the acquired company for a period of 10 years. Within this period it must be his main source of income.

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Taxes on the incorporation of companies in Spain

Before founding a company in Spain, one has to file a tax register with the Form-036 or 037. But when you start the company, one has to file Form-840 for the Tax on Economic Activities

What gains or losses are exempt from income tax?

The gain derived from the transfer of a permanent home by persons over 65 years of age will not be computed. Neither for minors of that age who are in a situation of accredited dependence.

Profits from the sale of the main residence will also be exempt. However, the total amount obtained must be reinvested in the purchase of a new primary residence. The reinvestment must be made within a maximum period of two years.

Regarding the losses, those not justified will not be counted in any case. Nor those due to consumption or losses in gambling.

In the case of losses derived from the transfer of assets, they shall not be computed when the taxpayer acquires equivalent items within the year following the date of transfer. In the case of securities admitted to trading, the period shall be two months.

How should profits or losses be charged?

The amount of the capital gains and losses will be the difference between the acquisition value and the transfer value.

For these purposes, acquisition value will be understood to be the value of the acquisition:

• The amount of the purchase;
• The cost of investments or improvements applied to the goods;
• The expenses and taxes inherent to the acquisition, excluding interest that would have been paid.

For the other part, the transfer value will be the real value at which the sale was made. Any expenses and taxes paid by the transferor may be deducted from such value.

In the case of lucrative transfers, the calculation of the values will be made in accordance with the inheritance and gift tax.

The peculiarity of credit losses.

The gains and losses are patrimonial alterations of the taxpayer. These alterations may be caused by the existence of credit rights that become uncollectible. In order to calculate the loss due to uncollectible credits, it is necessary to meet certain requirements.

In this sense, the loss may be imputed to the tax period in which any of the following circumstances occur:

• To make effective a withdrawal within a refinancing agreement of those established in the Bankruptcy Law. It is required that the agreement will be judicial and homologated.
• That an agreement with a debtor becomes effective within the scope of a bankruptcy proceeding.
• That one year has passed since the beginning of an execution procedure, not involving bankruptcy, without collection of the credit.
• That the conclusion of the bankruptcy procedure without collection of the credit takes place.

As long as the creditor has a right that manifests itself in a minimal possibility of collection, the loss cannot be declared.

Conclusions

Under the Spanish tax system it is possible to mitigate certain income with losses suffered in certain property transactions. Many times the losses, correctly reported, can reduce the tax bill. However, it is necessary to know how and when losses can be imputed.

If this article has been of interest, we also suggest you to read the following article published on our website: The taxation of “carried interest”: a global controversy.