On the 1st of January, 2020 the Resolution dated the 5th of March 2019, from the Accounting and Auditing Institute came into force, which discusses the criteria to present financial instruments and other accounting issues related to the commercial legislation of corporations.
This Resolution is the development of the General Accounting Plan (referred to hereinafter as the PGC) concerning certain transactions carried out between a company (basically a public limited company or private limited company) and its associates, or vice versa: increases and reductions in share capital, distribution of dividends, structural changes (mergers, spin-offs…), etc.
So, from the 1st of January, 2020, to see how a reduction of share capital is entered in the accounts, for example, we shouldn’t just base ourselves on the PGC, we should also use this Resolution, because all the companies that use the PGC and the PGC adapted to SMEs must comply with the provisions established in this Resolution as well.
Although the main objective of the Resolution is to bring together in one regulation the different queries that the Accounting and Auditing Institute has been publishing on the matter, and therefore initially, the desire to innovate does not arise, it does bring up certain new issues that will have certain tax effects, when all is said and done. These effects are discussed in detail in the article, but below you will find a few basic brief conclusions that we have drawn from it:
- Accounting for compound financial instruments. When certain shares or shareholdings have characteristics of both equity instruments and financial liability, they have to be accounted for by separating the part that the company receives as equity instruments (which will be considered as equity) and the part that is received as financial liability. The dividends produced as a result of the part of the share or shareholding classified as liability, will be accounted for as a financing expense, which will not be tax-deductible, which means that the corresponding positive adjustment will have to be made in the payment of the Corporate Tax (IS).
- Concept of distributable profit. This concept is defined for the very first time and a formula is supplied to calculate it. The tax effects on this point seem to be limited, it is only used as interpretative criterion to implement other tax rules in which the concept of distributable profit, profit not distributed or similar concepts are used.
- Supplying paid-up shares to the associate legal entity and the distribution of the 118. The Resolution foresees that, if profits have been made in the investee company since the associate joined, all the sharing-out of the stock is going to be classified as the distribution of profits, which will give rise to accounting income in the associate. The supply of paid-up shares and the distribution of “other associate contributions” are also included (contributions to the 118), which means that the investment partner will earn accounting income that will be taxed if the exemption established in article 21 of the IS is not applicable, or in the future, if the exemption does not cover 100% of the distributed profit.
- Joint venture agreements. It includes a presumption that accepts proof to the contrary on the joint venture agreement: it is presumed that the linear cancellation of the liability is the option that gives the best picture of the transaction. This, together with the foreseeable reduction of the exemption for dividends by up to 95%, might make the joint ventures an attractive legal business to invest in.
- Accounting for capital reduction. The percentage of the reduction in the equity on the net worth in the investee company is related to the cost of the associate’s investment, which will have strange effects in terms of accounting, although there will not be any direct tax-related consequences, seeing as these effects will be cancelled by making adjustments in the IS.
- Structural changes. There are no significant innovations, either in terms of accounting or taxation, the regulation is limited to systemizing and clarifying the content in the PGC.
Pablo Robles – Tax Assistant