Corporate tax, how to distribute dividends?

What is Corporate Tax?

The Corporation Tax is the annual Tax that is applied to legal entities resident in Spanish territory and, more specifically, to capital companies, which we will refer to in this article.

Corporate tax taxes are the income obtained by capital companies due to their activity and are regulated in Law 27/2014, of November 27, on Corporate Tax (LIS), and by the regulations that develop it.

When is it presented?

Nowadays, all capital companies must submit the self-assessment corresponding to the Corporate Tax within a period of 25 days, after six months following the close of the financial year. This means that, usually, the Corporation Tax is submitted between July 1 and 25 of the year following the close of the fiscal year of the capital companies. It also applies to inactive companies since it is a tax obligation that exists, as long as the company still has legal personality.

Currently, the general corporate tax rate for capital companies is 25%. Lower corporate tax rates, such as the 15% tax rate applicable to so-called “newly created entities”, exist. There are also special regimes contemplated in Article 29 LIS that attribute lower tax rates, such as those applied to:

• fiscally protected cooperatives
• non-profit entities according to Law 49/2002
• variable capital investment companies
• financial investment funds
• real estate investment company and real estate investment funds
• pension funds, etc.

Tax rates have been reduced

In recent years, the different corporate tax rates have been substantially reduced, leaving the “small company” rates and the reduced tax rate for maintenance and job creation without practical application, as they are all equal to the 25% of the general rate.

The taxable event for Corporate Tax is the company’s obtaining profits at the close of the fiscal year, the amount of which will be recorded by the Corporate Tax in the event that the company does not have negative tax bases from previous years that would compensate.

Corporate Tax from the corporate point of view

From the corporate point of view, after the closing of the fiscal year on 12/31, within three months, the company’s administrative body will prepare its annual accounts, which include the financial statements with the results of the fiscal year. Subsequently, and always within the first six months of the year, the Ordinary General Meeting of Partners will be held, in which the annual accounts prepared will be approved, and therefore, the result of the year, based on which the self-assessment will be carried out of the Corporation Tax for the closed year. At the same General Meeting, the distribution of the results obtained will be approved by the partners. At that time, it may be decided to distribute dividends in favour of the partners of the remaining amount once the mandatory reserves have been allocated and the compensation of existing losses from previous years has been made.

Dividend distribution

The dividends will be distributed to all partners in proportion to the participation they hold in the company unless it has been established differently in the Statutes or in the Partners Agreement (with the establishment of a minimum limit or maximum to the distribution of dividends, or establishing a preferential dividend in favour of one of the partners).

The most common way to carry out the distribution of dividends at the time of distribution of results of the closed fiscal year. However, dividends can be distributed at any time during the fiscal year. Company, charged to the company’s voluntary reserves or with the distribution of interim dividends for the current year, taking into account the requirements and formalities that this last option entails.

In any case, the company must assess which of the options is the most convenient, considering its situation and circumstances.