Global Tax Alert | 13 March 2014

Spanish Government introduces new tax rules on capitalization of debt

  • Share

Executive summary

On 8 March 2014, Royal Decree-Law 4/2014 (RDL 4/2014 or Decree-Law) was published in the Spanish Official Gazette. RDL 4/2014 introduces several measures in relation to the refinancing and restructuring of business debt with the aim of improving the financial situation of Spanish entities. The Decree-Law introduces new Corporate Income Tax (CIT) rules affecting debt capitalization scenarios, the treatment of which had given rise to controversy in the recent past mainly due to the existing lack of symmetry between the accounting and tax treatment.

Detailed discussion


Generally, under Spanish GAAP the capitalization and/or forgiveness of shareholder loans to wholly-owned subsidiaries do not have an impact in the subsidiary's P&L (profit and loss) account. Rather the amount capitalized or waived gives rise to an increase in the subsidiary's equity for the same amount and, therefore, increases the value of the investment for the shareholder.

There are, however, cases when the subsidiary has to register income for accounting purposes as a consequence of the capitalization or forgiveness of debt (for instance, when the book value of the debt is above its fair market value).

Spanish CIT Law follows accounting, except where a specific rule provides otherwise. Hence, in the absence of a tax provision, where cancellation of debt income is registered by the subsidiary upon a debt capitalization or waiver, this income is, in principle, taxable for Spanish CIT purposes.

This notwithstanding, the Spanish Tax Authorities had interpreted (ruling issued on 5 July 2013) that accounting income derived from the capitalization or forgiveness of debt would not be taxable as long as:

  • The shareholder owned 100% of the Spanish subsidiary; and
  • The tax value of the receivable held by the shareholder was equal to the tax value of the payable at the subsidiary's level (i.e., the receivable had not been acquired at a discount).

On 28 January 2014, the Spanish Tax Authorities issued two binding rulings in which they confirmed that the above conclusion applies when the lender is a nonresident entity. The Tax Authorities have further interpreted that this criterion is also applicable when the loan had been granted by another group entity, wholly-owned, albeit indirectly, by the same shareholder as the Spanish subsidiary.

CIT Law amendment

RDL 4/2014 has now introduced a specific new CIT valuation rule for the capitalization of debt, which is applicable to fiscal periods starting as of 1 January 2014 onwards.

Under the new rules, accounting income arising at the level of the debtor upon the capitalization of debt is not taxable for Spanish CIT purposes. This is because under these new rules the debt that is capitalized is valued, for tax purposes, at the value the capitalization has for mercantile purposes.

The creditor is, however, now taxable on the difference between the capital increase agreed to upon the capitalization of the debt and the tax value of the capitalized debt. To put it differently, taxable income arises for the creditor when it has purchased the debt at a discount or impaired it for tax purposes.

The new rules do not contemplate scenarios where the debt is waived instead of capitalized, and this gives rise to uncertainties as to what is the correct tax treatment for this latter transaction.

Different taxation scenarios may arise depending on whether the creditor is a Spanish tax resident or not, as the rules contained in the CIT Law should not apply to non-Spanish tax residents. If the creditor is not a Spanish tax resident, tax exemptions may be available if it is resident in the EU or in a tax treaty country (to be confirmed on a case-by-case basis).


Considering the current economic environment, the new rules should facilitate the recapitalization of entities in need of additional funding with no adverse tax consequences at the level of the debtor. The tax residency of the creditor is an essential element to determine – on a case-by-case basis – whether Spanish taxation may be triggered for the same or not.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Abogados, Madrid
  • Alfonso Puyol
    +34 915 725 010
  • Laura Ezquerra
    +34 915 727 570
Ernst & Young LLP, Spanish Tax Desk, New York
  • Cristina de la Haba
    +1 212 773 8692

EYG no. CM4256