On February 17, 2025, the Spanish Constitutional Court admitted two questions of unconstitutionality raised by the Superior Court of Justice of the Valencian Community (questions of unconstitutionality 2525/2024 and 2840/2024) regarding the 14th Additional Provision of the CIT Law, concerning the minimum payment that entities are obliged to pay in the CIT installment payments, for entities with a net turnover exceeding €10M.

This provision establishes that the amount to be paid cannot be less than, in any case, 23 percent of the positive result of the profit and loss account for the period of the first 3, 9, or 11 months to which the installment payments correspond, regardless of whether the amount resulting from the general method of determining the taxable base results in a lower amount. This means that certain taxpayers will have to make advance payments in amounts higher than what will actually result from the final CIT for the fiscal year.

These questions will assess whether said provision infringes the principle of economic capacity outlined in article 31.1 of the Spanish Constitution, based on the argument that the advance payment did not maintain the proper relationship with the actual income intended to be taxed, as the percentages considered are being applied to gross income that includes concepts not taken into account to determine the tax base or are established without the maximum correspondence and correlation between the tax base of the tax and the one used to calculate the installment payments.

In the event that the Constitutional Court declares this provision unconstitutional, taxpayers who challenge this situation could obtain interest on arrears in their favor for the difference between the advance payment made with the minimum payment mechanism and the amount that would have resulted from following the general procedure.

The legal consequences of a potential declaratory judgment of unconstitutionality will be directly related to the temporal scope of its effects, as established by the Constitutional Court itself. In recent years, it has been common for the Constitutional Court to limit the effects of its judgments favorable to the interests of taxpayers only to those situations where the taxpayers have challenged their tax situation at the time the judgment is issued.

New amendments to the CIT Law

Through Law 7/2024, of December 20, in addition to transposing the Pillar 2 Directive, other tax measures have been introduced, some of them relevant for Corporate Income Tax purposes:

• The reestablishment of several measures related to the CIT foreseen in Royal Decree 3/2016, December 2nd, which were declared unconstitutional by the Constitutional Court in its ruling of January 18, 2024 due to the fact that the legislative procedure carried out to enact such measures was not accurate. The measures that have been reestablished are the following:
• The reestablishment of the 50% limitation on the offsetting of carryforward tax losses for entities with net turnover between 20 and 60 million euros, and the 25% limitation for entities with net turnover exceeding 60 million euros (instead of the general 70% limitation, regardless of the net turnover of the taxpayer).
• The reestablishment of the 50% limitation on the application of deductions to avoid international double taxation for entities with a net turnover exceeding 20 million euros.
• The reestablishment of the mandatory reversal of portfolio impairments considered tax-deductible before January 1, 2013, regardless of the company’s net turnover. This reversal must be carried out, at a minimum, in equal parts in the taxable base corresponding to each of the first three tax periods starting from January 1, 2024. Positive income generated can be offset with negative taxable bases generated in periods prior to 2021, without applying the 25% and 50% limits for the offset of taxable bases, but instead using the general 70% limit.
• Extension to 2024 and 2025 of the 50% limitation on the integration of individual negative taxable bases in tax consolidation groups. The amount that has not been integrated will be reversed on a linear basis (i.e., 10% integration per year) over the following ten years.
• For tax periods commencing from January 1, 2025, the reduction in the taxable base for the capitalization reserve will increase from 15% to 20%, and if the entity meets certain requirements related to workforce increase, this percentage can rise up to 30%.

R&D&IT CIT deduction

As outlined in the previous newsletter, the Supreme Court has accepted the appeals filed against certain Spanish National Court’s judgments and annulled the previous decisions, which had upheld reports from the Spanish Tax Authorities’ R&D&IT Support Team that contradicted the opinions of the Ministry of Science and Innovation. In this regard, the Supreme Court concluded that for R&D&IT 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&IT 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.

In light of the above, the Spanish Central Economic-Administrative Court has adopted in rulings 2397/2024 and 199/2022, dated November 19, 2024, and October 21, 2024, respectively, the criteria followed by the Spanish Supreme Court but just for those fiscal years prior to FY15 on the basis that the Supreme Court has ruled on deductions for fiscal years governed by the former CIT Law (in force until 2014).

Therefore, the Spanish Central Economic-Administrative Court has confirmed that for fiscal years under Law 27/2014 (the current CIT Law in force), although the report of the Ministry of Science and Innovation is binding for the Spanish Tax Authorities, it is exclusively in relation to the qualification of the activities. Hence, the Spanish Tax Authorities are indeed authorized to modify or alter the expenses that can form part of the deduction base.

Consequently, it is foreseeable that litigation on this issue will continue until the Supreme Court expressly rules on the binding effects of the reasoned reports for deductions generated in fiscal years starting from January 1, 2015.