Spain reintroduces and extends limitations on use of tax losses and foreign tax credits, after prior implementation was ruled unconstitutional

Executive summary

A new law¹ passed in Spain on 20 December 2024 to implement Pillar Two legislation into Spanish domestic law² incorporates some additional tax measures, including the reintroduction and extension of limitations on the use of tax losses and foreign tax credits discussed in this Alert.

In January 2024, the Spanish Constitutional Court ruled that a prior implementation of certain limitations to the use on carried-forward tax losses and tax credits by large taxpayers was unconstitutional due to use of an unsuitable legal instrument for its approval.

The new legislation reintroduced the same limitations and was designed to overcome the obstacles described by the court by using adequate means (a proper law) to enact the changes.

Among other tax measures, the new law:

1. Reintroduces limitations on the use of carried-forward tax losses (capped at 50% or 25% of taxable income) for large taxpayers
2. Reintroduces limitations on the use of foreign tax credits (capped at 50% of the tax due) for large taxpayers

The law also extends to 2024 and 2025 a temporary limitation applicable to tax groups in 2023 that caps the amount of individual current-year losses that are taken into consideration to calculate consolidated taxable income.

These measures are aimed at raising tax revenue and will generally result in higher cash tax disbursements for corporate taxpayers.

Detailed discussion

In its January 2024 ruling, the Spanish Constitutional Court concluded that the procedure followed to implement these same limitations in the past (by means of a Royal-Decree Law)³ was not appropriate to introduce amendments to essential elements of the Corporate Income Tax (CIT); therefore, the court declared the rules unconstitutional and null and void.⁴ However, the court did not address the validity of the rules themselves (i.e., adequacy to the principle of tax capacity, which remains to be tested if these new measures are again brought before the Constitutional Court).

The reintroduction of the limitations through Law 7/2024 is intended to provide an appropriate procedure — a "proper" law — to effectively overcome the procedural flaws underscored by the court.

Limitations on the use of carried-forward tax losses and foreign tax credits

The Spanish CIT Law establishes a general limitation on the use of carried-forward tax losses (CFTLs), which can only be used to offset up to 70% of the taxable income or up to €1m, whichever is higher. The use of foreign tax credits (FTCs) is generally limited to the tax due.

Following passage of the new law, for tax periods starting in 2024 onward, the limitation on the use of carried-forward tax losses applicable to large taxpayers is increased as follows (while the €1m safe harbor is maintained):

• Taxpayers with revenue between €20m and €60m in the prior fiscal year are only permitted to use CFTLs to offset up to 50% of taxable income.
• Taxpayers with revenue exceeding €60m in the prior fiscal year are only permitted to use CFTLs to offset up to 25% of taxable income.

Similarly, for tax periods starting in 2024 onward, the use of FTCs is limited for large taxpayers with revenue exceeding €20m in the prior fiscal year. These taxpayers may only use FTCs to offset up to 50% of the tax due.

Temporary cap on computation of individual current-year losses by CIT groups extended to 2024 and 2025

The new law extends to 2024 and 2025 a temporary measure applicable to CIT groups that originally⁵ only applied in 2023. The provision introduces a cap that limits the amount of current-year loss that group members may contribute to the consolidated taxable income to 50% of the individual negative result.

The consolidated CIT group will claim the remaining 50% of those individual losses over the 10 years following the year when the limitation applied (2024 or 2025), even if the entity that generated the loss is excluded from the group. The recapture will not be affected by the limitations to the use of CFTLs. If the CIT group is disbanded or extinguished, the outstanding amount will be claimed in the last fiscal year in which the tax group is in place.

Implications

Application of these measures is likely to result in higher cash tax disbursements for corporate taxpayers, which may in some cases be alleviated through planning strategies. Groups with presence in Spain and taxed under the consolidated CIT regime should consider performing an impact assessment and evaluation of mitigation strategies.