In this article we would like to analyse the effects that arise from the classification of an entity as an asset-holding company for corporate tax purposes, the most common entities being trading companies, i.e., Sociedad Anónima, Sociedad Limitada, etc. This is not a frequent occurrence, however, if it does occur, there are important tax consequences, which are generally unforeseen. On the other hand, we would like to mention that, in order to simplify the analysis, we will omit the details concerning groups of companies.
The current Corporate Income Tax Law classifies as an asset-holding entity, which must be understood as not carrying out any economic activity without the possibility of proof to the contrary, an entity in which more than half of its assets are made up of securities or are not used for the development of an economic activity.
One of the practical consequences of a company being considered as a property company for corporate income tax purposes is the loss of the right to benefit from the tax incentive scheme for small entities established in Chapter IX of Title VII of the current Corporate Income Tax Law. This scheme is applicable to entities whose net turnover in the immediately preceding tax period is less than 10 million euros. Let us recall what these profits consist of:
- Freedom to depreciate new fixed assets and investment property used for economic activities, subject to an increase in the number of employees.
- Accelerated depreciation, by being able to double the maximum straight-line depreciation coefficient provided for in the officially approved depreciation tables, of new tangible fixed assets and investment property, as well as intangible fixed assets, in both cases assigned to economic activities.
- Deduction of the possible insolvency loss up to 1 % of the total debtors existing at the end of the tax period.
- Taxable income equalisation reserve, which allows 10 % of the taxable income for the year to be offset against any tax losses that may arise in the following five years.
In addition, and among other things, the right to be taxed at 15% in the first two years in which it makes a profit after its creation, to use negative tax bases in the event of a change in the shareholder composition and loss of the exemption on the capital gain obtained on the transfer of the holding in an asset-holding entity by another company, generally a holding company, which corresponds to the net increase in undistributed profits generated by the investee (and asset-holding entity) during the time the holding is held, is lost.
At this point, it is worth analysing what happens in the case of "supervening ownership", i.e. what happens when an entity that has been carrying out a business or professional activity acquires, at a given time and by whatever means, an asset that cannot be considered to be used for the development of an economic activity and whose value exceeds 50 % of the total assets of the entity.
The Corporate Income Tax Law establishes that the value of the entity's total assets, securities and assets and liabilities not assigned to an economic activity shall be that which is deducted from the average of the entity's quarterly balance sheets for the financial year. In other words, in order to determine whether an entity is to be considered as a balance sheet entity, it is necessary to draw up a balance sheet at the end of the financial year in which, instead of showing the year-end balances, the average balance of each item determined on the basis of the balances resulting from each of the quarterly balance sheets should be shown. This criterion differs from that established in the Wealth Tax Law, where it is established that an entity will be considered as an asset, and therefore not exempt from wealth tax, when the value of the items not assigned to business activities exceeds the value of the total assets of the entity for more than 90 days of the financial year, with the same items being considered basically unaffected as established in the Corporate Income Tax Law for these purposes.
The Law also establishes that money or credit rights deriving from the transfer of assets assigned to economic activities, as well as certain securities detailed below, which have been transferred in the tax period or in the two previous tax periods, will not be counted as non-assigned elements. Therefore, if these funds have not been reinvested in assets assigned to the development of an economic activity, or if they have been distributed to the shareholders, either through dividend distributions or capital reductions, and assuming that they represent more than half of the total assets of the entity, they will cause the entity to be classified as an asset-holding company. This criterion differs from that established in the Wealth Tax Law, which establishes that items not assigned to economic activities or securities will not be considered as items whose acquisition price does not exceed the amount of the undistributed profits obtained by the entity, provided that such profits derive from the performance of economic activities, with the limit of the amount of the profits obtained both in the year itself and in the last ten preceding years.
With regard to securities, the Corporate Income Tax Law establishes that the following shall not be computed as such, and shall therefore be considered as being assigned to the development of an economic activity:
- Those embodying claims arising from contractual relationships established as a result of the pursuit of economic activities. Among these, the most common would be customer balances. On the other hand, it should be noted that nothing is established in relation to cash balances.
- Those that grant at least 5% of the capital of an entity (shares, equity, etc.) and are held for at least one year, for the purpose of directing and managing that holding, provided that the corresponding organisation of material and personal resources is in place, and the investee is not considered an asset-holding entity. Here we would enter into the subject of holding companies, the analysis of which we will leave for another article.
Occasionally a client who carries out his economic activity through a company asks us about the advisability of buying what is going to be his main residence in the name of the company, which is going to account for more than 50% of the total assets of the company. Responding to this query requires an analysis of the particular situation, but at the outset it does not seem the most advisable, because, in addition to what has been discussed so far, it is necessary to analyse the issue of remuneration in kind, deductibility of expenses linked to this home, etc., aspects that we will leave for another article.
The Confialia team is fully trained, in addition to internal controls to detect this type of situation, and subsequently analyse, together with our clients, the best possible alternative.