Deductibility of technical provisions

The Spanish General Directorate of Taxes (hereinafter, “SGDT”) has recently issued two binding rulings, V1382-24 and V1383-24, where has addressed key issues regarding the tax deductibility of technical provisions for insurance entities. These rulings are particularly impactful for foreign insurance entities operating in Spain through permanent establishments, focusing on the limits of deductibility of technical provisions and the treatment of reinsurance income for corporate tax purposes.

The SGDT confirms that, notwithstanding that from an accounting perspective technical provisions are determined in accordance with the substantive and accounting regulations of the country of origin that apply (i.e. head office's jurisdiction), the expenses recorded in accordance with these regulations for the allocation of provisions will be tax deductible up to the amount of the minimum amounts established in the applicable Spanish regulations, specifically in the Sixth Additional Provision of Royal Decree 1060/2015 (ROSSEAR) on the organization, supervision and solvency of insurance and reinsurance entities.

The SGDT has concluded that, although the applicable regulatory legislation for Spanish branches of a foreign insurance entity is that of the parent company's jurisdiction, from a Non-Resident Income Tax perspective, expenses related to these technical provisions will be tax-deductible, provided they do not exceed the minimum amounts established by the Spanish regulations on the organization, supervision and solvency of insurance and reinsurance entities.

The conclusions derived from the responses to Binding Consultations V1382-24 and V1383-24 for the purpose of determining the minimum fiscally deductible amount of these technical provisions are as follows:

• If the claims reserve should not be calculated using a statistical method according to the applicable regulations of the country of origin, the expense corresponding to the allocation to the provision recorded in the fiscal year, in accordance with the (non-statistical) method provided in the regulations of the country of origin, will be considered a tax-deductible expense.
• If the entity, according to the regulations of the country of origin must calculate the claims reserve using a statistical method, the allocation to the provision will be tax deductible to the extent that it does not exceed the minimum amount established in Spanish regulations. Specific calculation rules apply during the first three fiscal years in which a statistical method is applied.

It should be noted that, for the purposes of calculating the amount that should be considered tax-deductible in accordance with article 14.7 of the Spanish Corporate Income Tax Law, the SGDT has concluded for the first time in the aforementioned tax binding rulings that the amount corresponding to ceded reinsurances recorded as technical provisions must be considered when determining the minimum deductible amount.

This aspect is novel and very relevant given that, until the resolution of the referred binding rulings, there was no clear tax criterion on how to calculate the tax deductibility of the claims reserve in cases where there was ceded reinsurance. In practice, the income recorded associated with the asset provision derived from the subscription of reinsurance agreements was considered fully taxable.

On this point, the SGDT indicates that, based on a systematic and reasonable interpretation of the regulation, for the calculation of tax-deductible provisions, the participation of ceded reinsurance must be considered. In other words, the method used to determine the minimum amount of claims reserves will also be applied to determine the share corresponding to ceded reinsurances. The necessary calculations must be made to determine this participation separately from direct insurance.

The clarifications provided by the SGDT in the resolution of these consultations offer valuable guidance for insurance entities, allowing them to align their accounting and tax practices with current regulations. This can contribute to better management of tax risks and optimization of the tax burden.

Given the potential impact of these consultations, it is suggested that insurance entities carefully review the calculation methods applied, ensuring their compliance with relevant Spanish and foreign regulations. It is also important to evaluate the tax effect of the participation of ceded reinsurance in the calculation of fiscal adjustments, to ensure the correct application of fiscal provisions.

However, after these consultations, certain issues remain unclear as they have not been raised with the SGDT, such as what happens in cases of foreign insurers that start operating in Spain through a permanent establishment and determine their technical provisions using statistical methods from the beginning of their activity in Spain, as in these cases the minimum years required by the Sixth Additional Provision would not be met.

Research & Development & Innovation tax deductions

The Spanish Corporate Income Tax Law in force until 2014, established that, for the purposes of the R&D&I deduction, taxpayers could submit a motivated report from the Ministry of Science and Technology regarding compliance with the scientific and technological requirements necessary to qualify research, development, or technological innovation (hereinafter, “R&D&I”) activities. The Corporate Income Tax Law currently in force contains a similar provision, referring to the competent Ministry based on the subject matter.

In this context, the National Court rulings issued in 2022 represented a change in criteria that restricted access to the R&D&I deduction. According to the National Court, only some expenses related to software projects could be eligible for the deduction, regardless of whether a binding report has been issued by the Ministry of Science.

However, last October the Supreme Court has accepted the appeals filed against those judgments and annulled the previous decisions by the National Court, which had upheld reports from the Spanish Tax Authorities’ R&D&I Support Team that contradicted the opinions of the Ministry of Science and Innovation. In this regard, the Supreme Court concluded that for R&D&I projects carried out under the former CIT Law, the binding nature of the motivated report from the Ministry of Science and Innovation on the Tax Administration extends not only to the qualification of the project as R&D&I, but also with respect to the investments and expenses that, when presented to the consulting body, have been positively evaluated. Therefore, this type of report cannot be rebutted or ignored by the Spanish Tax Authorities, either in the qualification of the projects as eligible for the tax deduction or with regard to the expenses under consideration.

Additionally, the Court concluded that the actions of the Spanish Tax Authorities in the analyzed cases were contrary to the principles of legal certainty and legitimate expectation, as they distorted the objectives pursued by the legislator with the deduction, such as incentivizing R&D&I activities and investment in projects that contribute to updating companies and enhancing their competitiveness.

Notwithstanding the above, it should be noted that, since the Supreme Court has ruled on deductions for fiscal years governed by the former CIT Law (in force until 2014), which present certain differential nuances regarding the regulation of motivated reports compared to the CIT Law currently in force, further analysis of the legal reasoning in the published judgments will be necessary to determine their impact on fiscal years beginning on or after January 1, 2015, as the possibility remains that the tax inspection may challenge the quantification of the deduction base.

For periods prior to July 17, 2021, unit-linked policies are not subject to the Wealth Tax if the policies do not recognize the right to surrender during the term of the contract

Until 2021, article 17 of Law 19/1991, of June 6, on the Wealth Tax (hereinafter, “Spanish WTL”) stated that "life insurance policies shall be computed based on their surrender value at the time the tax is due". However, with the entry into force of Law 11/2021 on July 17, 2021, it was specified that "in cases where the policyholder does not have the right to exercise the option for total surrender on the date the tax becomes due, the insurance shall be computed based on the mathematical reserve value on the said date as part of the taxable base of the policyholder".

In this context, the Spanish Supreme Court (rulings 5132/2024 and 5164/2024, both dated October 14, 2024) upheld the appeals of two taxpayers who had received assessments from the Tax Agency, considering that the unit-linked insurance they had contracted should be included in the tax base for the Wealth Tax based on its surrender value, equivalent to the amount of mathematical reserves as of December 31 of each year.

The Regional Economic-Administrative Court of Galicia and the High Court of Justice of Galicia partially upheld their claims and appeals, respectively, rejecting the arguments concerning the impropriety of the assessments regarding the inclusion of unit-linked insurance in the taxpayers' Wealth Tax base.

In this regard, the Spanish Supreme Court accepted the appeals and concluded that life insurance policies of the unit-linked type, in which if the policy does not recognize the right to surrender during the term of the contract, are included in the taxable base for the Wealth Tax only from the entry into force of the amendment to article 17.One of the WTL, through Law 11/2021.

Thus, in accordance with the Spanish Supreme Court's literal interpretation of the previous provision in Article 17.1, which was in force until July 2021, life insurance policies should have been valued based on their surrender value at the time of accrual. Therefore, when no surrender value existed, no amount should have been included in the taxable base for the Wealth Tax in fiscal years previous to the referred amendment.