In recent months, the Executive has launched a package of measures aimed at obtaining a greater tax contribution from large estates and companies. Among them we have already talked about the Solidarity Tax on Large Fortunes. Today we will talk about another far-reaching measure. This is the temporary reform of the tax consolidation regime that limits the offsetting of losses in groups of companies taxed under the tax consolidation regime.
What is the tax consolidation regime?
Introduced in 1995, the tax consolidation regime is a special tax regime based on the tax group as the sole taxpayer or taxpayer of the tax, rather than the individual entities that make up the group.
With it, corporate tax is calculated on the basis of the consolidated taxable income of the tax group. That is: the sum of the individual tax bases of all the entities that make up the group. Most commonly, with this calculation, the tax losses that may be recorded by some companies in the tax group during the year can be offset against the taxable profits generated by the rest of the companies in the group.
This advantage disappears with the new temporary rule which, according to the Ministry of Finance and Public Administration, could affect 3,609 companies this year.
What changes with the new temporary reform of the tax consolidation regime?
The use of loss compensation is reduced by half
The way in which the taxable base of tax groups is calculated changes. In 2023 it will be determined by the sum of 100% of the positive tax bases and, this is the novelty, only 50% of the negative tax bases.
50% of the negative bases may be integrated in the following 10 financial years
Tax losses not included in the tax base in 2023 can be included in equal parts in the following ten tax periods. In other words, their full recovery is delayed to the period between 2024 and 2033, a period of 10 years.
Moreover, the recovery of the amount not deducted must be carried out by the group itself. In this way, companies that could leave the group in the coming years are prevented from using their tax loss carryforwards that have not been used in 2023. This breaks with the general criterion applied until now. Prior to this reform, entities leaving a group were entitled to take any unused tax credits they had generated.
In cases of termination of the group, the amount pending recovery may be included in the consolidated tax base of the last tax period in which the group is taxed under the consolidated tax regime.
Consequences of the new tax consolidation regime
In practice, this reform will mean a tax increase for groups generating tax losses in 2023. Among the most affected will be many venture capital investment structures. Because in this sector the creation of holding companies is common, in which the acquisition debt associated with leveraged buyout operations is placed.
On the other hand, the new system of linear recovery over ten years of amounts not deducted could favour certain tax groups wishing to accelerate their loss recovery schedule.
How to act now
It is therefore time to analyse the impact that the reform will have on our tax groups and to consider what possibilities we have to mitigate the possible negative effects. These are two of the strategies we could put in place:
- Undertake corporate restructuring operations aimed at a greater distribution of profits among the different companies of the tax group.
- Allocate the acquisition debt in holding companies to the operating subsidiaries generating positive tax bases.
At Confianz we can help you plan the best way to deal with the temporary reform of the tax consolidation regime affecting loss relief in 2023.