The capitalization reserve is a tax mechanism designed to encourage companies' self-financing and strengthen their equity. The main objective is to promote the reinvestment of profits rather than their distribution, thereby reinforcing the financial position and future investment capacity of companies.
This mechanism is regulated by Article 25 of the Corporate Tax Law (LIS). Following the reform introduced by Royal Decree-Law 4/2024 of June 26, taxpayers subject to the general tax rate of 25%, those taxed at 30%, and newly created companies taxed at 15% in the first taxable period with positive taxable income and the following one, will be entitled to a reduction in the tax base of 15% of the amount of the increase in their equity, provided the following requirements are met:
1. The entity's increase in equity must be maintained for a period of 3 years from the end of the tax period to which the reduction applies, except in cases where the entity incurs accounting losses.
2. A reserve for the amount of the reduction must be set aside, which must appear on the balance sheet with absolute separation and an appropriate title, and it will be unavailable during the period mentioned in the previous point.
The reserve will not be considered as used in the following cases:
- When a partner or shareholder exercises their right to withdraw from the entity.
- When the reserve is eliminated, in whole or in part, as a result of operations to which the special tax regime established in Chapter VII, Title VII of the LIS applies.
- When the entity must apply the reserve due to a legal obligation.
It is important to note that the right to the reduction may not, in any case, exceed 10% of the positive taxable base of the tax period prior to the reduction, as mentioned in Article 11.12 of the LIS, and to the offset of negative tax bases.
If there is not enough taxable base to apply the reduction, the outstanding amounts may be applied in the two subsequent tax periods after the close of the tax period in which the right to the reduction was generated, along with the reduction that may correspond in that same period, always respecting the aforementioned limit.
Additionally, the increase in equity will be determined by the positive difference between the equity at the end of the fiscal year (excluding the results of that year) and the equity at the beginning of the fiscal year (excluding the results of the previous year). However, to calculate this increase, the following will not be considered as equity at the beginning and end of the tax period:
- Contributions from partners.
- Capital increases or equity through debt-for-equity swaps.
- Equity increases through transactions involving treasury stock or restructuring.
- Legal or statutory reserves.
- Non-distributable reserves set aside in accordance with the provisions of Article 105 of the LIS and Article 27 of Law 19/1994 of July 6, on the modification of the Canary Islands Economic and Fiscal Regime.
- Equity derived from the issuance of compound financial instruments.
- Equity related to variations in deferred tax assets due to changes in the tax rate.
These items will also not be considered when verifying the maintenance of the equity increase in each tax period in which it is required.
Finally, it is important to consider two rules:
- The reduction corresponding to the reserve provided for in this Article 25 of the LIS will be incompatible, in the same tax period, with the reduction in the tax base for the depletion factor provided for in Articles 91 and 95 of the LIS.
- Failure to meet the requirements will result in the regularization of improperly reduced amounts, as well as the corresponding interest on arrears, in accordance with Article 125.3 of the LIS.
For any queries, feel free to contact us.