Deduction to avoid legal double taxation for the tax paid abroad (Limits)
With the internationalization of the economy in recent decades, various mechanisms have been established to avoid double taxation in the domestic legislation of each country, in addition to have signed different Double Taxation Treaties. One of these methods is the deduction for international double taxation of Corporate Tax, which can be legal or economic depending on whether the same taxpayer supports two or more taxes of the same nature for the same income in different jurisdictions, or if the same income generate two taxes of the same nature in two different subjects, respectively.
In our today’s article we will talk about the legal double taxation deduction, regulated in Article 31 of Law 27/2014, of Corporate Tax, more specifically about the impossibility of deduction of part of the tax paid for income obtained abroad in certain cases, in detriment of foreign income with a reduced profit margin, provided it is not operated through a Permanent Establishment.
What does the Spanish Corporate Tax Law establish?
The legal text establishes that, if the positive income obtained and taxed abroad is included in the taxable base of the taxpayer, it will be deducted from the gross tax payable the lower of the following two amounts:
- The effective amount paid abroad due to a tax of an identical or similar nature to the Spanish Corporation Tax.
- The amount of the tax payable that would correspond in Spain for the aforementioned income if it had been obtained in Spanish territory.
It is not as simple as it may seem
According to the theory, there does not seem to be any problem, but in practice, for the quantification of the amount subject to deduction, several doubts may arise; even the Directorate General for Taxation itself varies the criteria to apply in different binding consultations.
The concept of the amount effectively paid abroad is quite evident, although it is worth emphasizing that if a tax incentive that reduces the amount to be paid has been enjoyed, such incentive will not be considered as a satisfied amount for the purposes of the deduction.
On the other hand, when determining the amount that would have to be paid in Spain, more doubts may arise. The logical thing – and what the DGT had been saying until a while ago, as a result of the binding consultation V0417-16 – would be that, for the purpose of eliminating double taxation, if in order to obtain the effective amount paid abroad, the income from foreign sources is multiplied by the tax rate of the country, for comparison with the amount of the full payment that would correspond to pay in Spain, foreign source income multiplied by the Spanish tax rate will be used.
ut in another query (V4259-16) published by the same Directorate General for Taxation eight months later, it specifies that expenses related to income have to be reduced and the deduction will be applied to the net income obtained. What is being said in this new interpretation of the law is that, to determine the amount of the full payment that would have to be paid in Spain for the aforementioned income if it had been obtained in Spanish territory the net income must be taken, determined by the difference between foreign income and its corresponding expenses. That is, it requires comparing income from a foreign source and the net amount corresponding to this income, which by definition can never be higher than the first. This criterion has been ratified by several courts, including the Supreme Court in several judgements.
This will generate the impossibility of deducting part of the tax paid abroad in the following cases:
- ALWAYS, when the tax rate abroad is higher than the Spanish one, damaging those with little margin of profit and,
- In many cases, even when the tax rate abroad is lower than the Spanish, if the margin is low of even non-existent.
If your company obtains income that is taxed abroad and you can not apply the deduction for double taxation of Corporation Tax for the amount paid abroad, do not hesitate to contact us, we will analyze your case in detail and with professionalism, proposing solutions to this as operating through a Permanent Establishment abroad.
Example: why can foreign income with a lower profit margin apply less deduction?
In order to see more clearly how the deduction works for double legal international taxation we leave you with two different cases and how they would pay in each case.