The Central Administrative Economic Court (TEAC) has just agreed with the General Directorate of Taxes (DGT) in a technical dispute that the body had been disputing with the Tax Agency for more than a year. At the center of the debate was corporate tax and how the distribution of an interim dividend was computed for a company that wanted to take advantage of the capitalization reserve in the year of the distribution.
The spirit of the regulations seeks to provide fiscal incentives for a company to dedicate the profits it obtains in a financial year to reinforce its capital through the increase in reserves and not to pay dividends. Thus, the law allows a company to deduct up to 10% of what the reserves increase in a specific year. The dispute was whether the dividend paid in that year should reduce that increase in reserves to which the deduction is applied. Initially, Taxes understood that for the calculation of own funds – a necessary procedure to benefit from the incentive – it was not necessary to compute that current dividend. The Tax Agency, on the other hand, argued that it should count for the calculation. The TEAC, in a firm resolution, establishes that the distribution does not harm the capitalization reserve in that year.
The decision of the TEAC, explains Pelayo Oraá, partner in the Corporate Taxation area of KPMG Abogados, and Salvador Ruiz Gallud, managing partner of the Fiscal Area of Equipo Economico, unifies doctrines and dispels the doubts that the Tax Agency had sown. The resolution, which confirms the prior criteria of Tributes, indicates that an interim dividend harms the capitalization reserve to be provided the following year, and not the incentive of the distribution exercise itself, they detail. “The effect is only temporary, but the taxpayer maintains the possibility of distributing interim dividends without harming the capitalization reserve for the year itself,” adds Ruiz Gallud.
In practice, for example, the calculation of the capitalization reserve for 2022 would not be influenced by an interim dividend distributed this year on the results of the same year. In other words, the 2022 reserve would only be influenced by the distribution of the profits for the 2021 financial year, which in this specific case will normally be made around June of this financial year, when the companies hold their respective meetings.
It is not a minor detail, continues Ruiz Gallud, since it gives some oxygen to the companies. “The partners will be able to take the dividend on account, for example because they need that liquidity for another company, without harming the company by not limiting or conditioning it when it comes to taking advantage of the capitalization reserve.”
However, adds Ruiz Gallud, the interim dividend distributed in 2022 will reduce the capitalization reserve to be provided in 2023 on the results of the 2022 financial year, “because the decision on its distribution will have already been made on a part the previous year”. It should be remembered that this incentive requires that the reserve be provided, so the distribution of dividends prevents taking advantage of the tax advantage.
If a company begins a year with reserves of 100 million and ends it with reserves of 200 million, 10% of those 100 million (10 million) may be deducted, regardless of whether it has paid a dividend in that year. If you have paid shareholders 50 million and, as a consequence, the reserves in the following year only increase by 50 million, in that second year you can only deduct 5 million, 10% of 50.
The court’s resolution, highlights Oraá, is in tune with the tendency to penalize the debt and, in parallel, fiscally stimulating the companies’ own funds. Specifically, adds Adolfo Zunzunegui, partner in charge of the tax area at Allen & Overy, the increase in own funds derived from the profit obtained in the year itself is not encouraged, “but the increase in own funds derived from the profit obtained in the previous year” . For this reason, the interim dividend on the result of the year itself, “which is nothing more than an early distribution of this”, should not be computed for the purposes of determining the variation in own funds at the end and at the beginning of the year.
The president of the Association of State Tax Inspectors, Julio Ransés Pérez Boga, celebrates the TEAC resolution and the unification of criteria on such a “complex” issue. He also throws a cloak at the Tax Agency, which went to court for its disagreement with Taxes. The reason, he explains, is that based on the literal wording of article 25 of the Corporate Tax Law, it could be understood that the active interim dividend had to be computed for the calculation of own funds at the end of the financial year and, therefore, counted when calculating the increase in own funds that constitutes the basis for calculating the capitalization reserve.