This post provides an overview of the Spanish legal framework applicable to the use of carried forward tax losses (NOLs) and briefly analyses the temporary limitation introduced by the recently published Law 38/2022, of 27 December, regarding the use of tax losses generated in 2023 by entities taxed under the corporate income tax (CIT) consolidation regime.
Spanish legal framework
Pursuant to the Spanish CIT Law, Spanish entities that are taxed individually (i.e. that do not form a CIT group) can offset previous years’ NOLs up to an amount of 70% of the year’s positive taxable base. In any case, taxpayers can offset NOLs of up to EUR 1 million without being subject to the 70% cap. In addition, the right to offset NOLs has no temporary limitations.
Since 2016, further restrictions apply to entities with an annual turnover exceeding EUR 20 million in the 12 months prior to the beginning of the relevant tax year:
- entities with an annual turnover in the preceding tax year ranging between EUR 20M and EUR 60M can only offset NOLs representing a maximum of 50% of their positive taxable base; and
- entities with an annual turnover in the preceding tax year exceeding EUR 60M can only offset NOLs representing a maximum of 25% of their positive taxable base.
Notwithstanding the foregoing, as a general rule, the Spanish CIT Law states that the abovementioned limitations will not apply in the tax period in which the entity is dissolved (except if this dissolution results from a restructuring transaction).
The CIT consolidation regime
Under the CIT consolidation regime, a group is considered a single taxpayer for CIT purposes, which means that the group’s taxable base is calculated as the sum of the individual taxable bases of each group entity (so that income and expenses of the different group entities which fall within the same fiscal year are offset without restriction).
The groupʼs NOLs can be offset against the group’s positive taxable base, subject to the same quantitative limits described above (i.e., 70%-50%-25%), which likewise are determined on the basis of the annual turnover generated by the group.
Temporary limitation on the use of tax losses generated in 2023 by the different group entities taxed under the CIT consolidation regime
Law 38/2022 introduces an additional provision (eighteenth) in the Spanish CIT Law, which modifies exclusively for 2023 one of the key rules for determining the CIT consolidated group’s taxable base. This new measure prevents the “automatic” offsetting of positive and negative taxable bases generated by the different entities within the group, which is one of the main features of this tax regime. Therefore, the group’s taxable base for fiscal year 2023 will be calculated by adding 100% of the individual positive taxable bases, and only 50% of the individual negative taxable bases.
The remaining 50% of the individual tax losses that were generated in 2023, but excluded from the group's taxable base, will instead be deducted from the group's taxable base on a linear basis over a 10-year period from 2024 (i.e., during years 2024-2033) without taking into consideration the quantitative limits described above (i.e., 70%-50%-25%).
This deduction will be available even if the entity generating the tax losses is dissolved at a later stage. But it will cease to be available if the group ceases to exist; in that case, the remaining amount of tax losses must be included in the group's tax base for the last tax period in which it is taxed under the CIT consolidation regime.
Taking a simplified example to illustrate the effect of the new limitation, we shall assume a group made up of three entities (none of which have any NOLs). Entity 1 has a profit of EUR 800,000; Entity 2 a profit of EUR 600,000; and Entity 3 a loss of EUR 200,000. Under the normal CIT consolidation regime, the group's tax base for 2023 would be EUR 1,200,000 (EUR 800,000 plus 600,000 minus 200,000) and the tax due would be EUR 300,000 (with CIT @ 25%), assuming no other allowances are available. With the new limitation, the group's tax base for 2023 would instead be EUR 1,300,000 (EUR 800,000 plus 600,000 minus 100,000) and the tax due would be EUR 325,000 (with CIT @ 25%), again assuming no other allowances are available, but in each year from 2024 to 2033, the group's taxable base would be further reduced by EUR 10,000.
Spreading relief for 50% of losses generated by individual group entities in 2023 over 10 years in this way will have a very different impact depending on the characteristics of each group, which should be analysed on a case-by-case basis. In any case, this temporary limitation will certainly entail significant financial costs for many groups.