Many companies throughout their economic life require financing to carry out their business projects.
Our firm is familiar with this type of operation, which is becoming increasingly common when the investment does not normally materialise at the time of incorporation of the company, via share capital, or as a contribution from partners.
When we talk about financing, we could include all types of financial engineering that allow the company receiving these funds to go ahead with its business commitments.
Once the company has formalised the form of financing and the conditions of the financing (useful life, interest rate, form of repayment of the instalments, etc.) and appears in the financial operation as borrower (loan for use) or borrower (credit line), it is especially important to analyse from a tax point of view, the tax obligations that the company has and not to forget that the Spanish tax authorities can derive liability to this party if it does not comply correctly with these tax obligations.
The range of possibilities to be analysed in this case could be covered in another blog (tax residence and legal status of the lender and borrower, analysis of double taxation avoidance agreements, among others), however, in this blog, we will focus on the withholding obligations of the borrower or accredited company at the time of accrual of interest on the chosen financial instrument (loan for use, line of credit, joint venture loan agreements, among others).
For this analysis, it is necessary to take into account the provisions of article 65 of Royal Decree 634/2015, of 10 July, approving the Corporate Income Tax Regulations, which we transcribe below:
“1. In general, the obligations to withhold and pay on account shall arise at the time the income, in cash or in kind, subject to withholding or payment on account, respectively, is payable, or at the time of payment or delivery if this is earlier.
In particular, interest shall be deemed to be payable on the due dates indicated in the deed or contract for its settlement or collection, or when it is otherwise recognised on account, even if the recipient does not claim its collection or the income accrues to the principal of the operation, and dividends on the date established in the distribution agreement or from the day following that of its adoption in the absence of the determination of the aforementioned date.
- In the case of income deriving from the redemption, repayment or transfer of financial assets, the obligation to withhold or pay on account shall arise at the time the transaction is formalised.
- In the case of income obtained as a result of the transfer or redemption of shares or units representing the capital or assets of collective investment institutions, the obligation to withhold or pay tax on account shall arise at the time the transaction is formalised, regardless of the agreed collection conditions.”
According to the above, the withholding by the borrowing or credited company will arise at the moment the interest becomes payable.
So far, so good, we review the financing contracts that our clients have and focus on the interest accrual clause.
However, what would be the tax treatment when the client, due to temporary cash flow problems or because it is contemplated in the formalised contract, capitalises the interest, not paying it, and it accumulates to the principal of the operation?
This is where the problem arises, which is why we should be very careful when capitalising the interest, since according to the provisions of Article 65.1 transcribed above, at that very moment, the obligation to withhold would also arise and our client-company would be obliged to pay the withholding to the Spanish tax authorities, through Form 123 or Form 216, as appropriate.
Having explained the above casuistry, we always advise you to analyse the tax perspective of any financial operation that you are going to carry out from a business point of view.
Leticia Cayuela Mayor
