Can a company deduct tax paid abroad from its Corporation Tax?
In the context of a globalised economic system in which commercial relations between companies from different countries are a fact of life, the question arises as to how this will affect their taxation. Specifically, if a company incorporated in Spain supplies goods or services to companies not established in Spain for which it obtains income in a certain country, it is likely that this income will be subject to tax in the country of destination of these goods or services. In this article, we discuss how to deduct the tax paid abroad from the Spanish resident entity’s Corporation Tax.
How is foreign income taxed for Corporation Tax purposes?
Companies incorporated under Spanish law are subject to corporate income tax on the income they earn.
Specifically, the taxation of the positive income obtained by the Spanish company will be determined, firstly, by the provisions of the Agreements to avoid International Double Taxation between Spain and the destination country and, secondly, by the provisions of Law 27/2014 on Corporation Tax.
In this respect, and in accordance with the Conventions for the Avoidance of Double International Taxation, if a company resident in Spain obtains income from the supply of goods or services to a company resident abroad, such income may be subject to taxation:
- Only in Spain
- Only abroad
- Both in Spain and abroad
In those cases in which the Conventions for the Avoidance of Double International Taxation establish that the company incorporated in Spain must pay tax in the destination country, it will have to assume a tax or withholding in the foreign country, which will be deductible for the Spanish company through certain tax mechanisms.
Deductibility of tax paid abroad for Corporation Tax purposes
The tax or withholding tax paid abroad may be deductible for Corporate Tax purposes, either as a deductible expense in the tax base or as a deduction for the avoidance of international double taxation in the gross tax payable, as provided for in Article 31 of the Corporation Income Tax Act.
Deductions to avoid International Double Taxation will be applied in cases where taxation is shared between the country of residence of the company and the country of destination of the supplies of goods or services, as a result of double taxation. In this way, this deduction will be a mechanism that will try to correct the double taxation.
First of all, in cases in which the Spanish company has recorded the tax paid abroad as an expense, this will be considered a deductible expense in the tax base, only for the part that is not deductible in the full amount of the corporate income tax due to the application of the Deduction for the Avoidance of Double International Taxation, provided that this expense corresponds to activities carried out abroad.
How is the deduction for the avoidance of double international taxation applied to corporate income tax?
Article 31 of the Corporate Income Tax Act establishes that, in those cases in which the positive income that a Spanish company has obtained in a country other than Spain, and which is taxable in both countries, a deduction for the avoidance of International Double Taxation will be applied to its total tax liability, specifically, for the lesser of these two amounts:
- The actual amount paid abroad in respect of a levy of a similar or analogous nature to Corporation Tax.
It is important to note that if a double taxation avoidance treaty applies, the deduction may not exceed the tax provided for in that treaty.
In addition, taxes which have not been paid abroad by virtue of any kind of tax benefit, such as an exemption or relief, are not deductible.
- The amount of the integral tax that would be payable in Spain if this income had been obtained in Spanish territory.
In those cases in which the Spanish company obtains several foreign incomes in the same tax period, the deduction will be made by grouping the incomes from the same country.
Do you need advice? At Devesa we are specialists in international taxation: