Tax innovations in the Draft Law on the General State Budget for 2021

At the meeting of the Council of Ministers on 27 October last month, the referral to the Cortes Generales of the Draft Law on the General State Budget for the financial year 2021 was approved, it  is currently being processed in the Congress of Deputies.

Among the tax measures included in the bill are some that were agreed upon as part of the pact between the PSOE and Unidas Podemos to form the current coalition government, and which had already formed part – albeit with slight variations – of the Bill for the General State Budget for the financial year 2019 which did not find sufficient support in the Cortes for its processing, which in turn, led to the calling of elections last year.

The following are some of the tax innovations included in the Bill for the General State Budget for 2021, with which the Government estimates that 1,862 million euros will be collected in 2021 and 2,135 million euros in 2022:

Personal Income Tax 

– Increase in the maximum marginal rates applicable to the highest incomes, both in the general base and in the base of income tax savings:

– General payable base – The rate applicable from 300,000 euros is increased by 2 points, with this bracket being subject, depending on the Autonomous Community of residence, to rates of around 47% (until now this maximum accumulated rate was around 45%).

– Liquidatable base of the savings – The rate applicable from 200,000 euros is increased by 3 points, so that this bracket is now taxed at 26% (until now the maximum rate was 23%).

– Pension plans: The maximum limits applicable to reductions in contributions to individual pension plans are reduced from the current 8,000 euros to 2,000 euros. However, this limit will be increased by 8,000 euros provided that the increase comes from employer contributions.

Wealth Tax 

– The tax rate for assets over 10 million euros is increased by one point, raising the maximum marginal rate from the current 2.5% to 3.5%.

– Likewise, the provision contained in the Tax Law establishing the abolition of this tax, the application of which has been postponed year after year, is eliminated. Consequently, the Wealth Tax is now a tax payable for an indefinite period.

Corporate Tax

– Limitation of exemption on dividends and capital gains from domestic and foreign sources. The exemption contained in Article 21 of the Corporate Income Tax Law affecting dividends and capital gains from significant shareholdings is amended so that the amount to be exempted will be 95% of the dividend or positive income obtained on transfers as of 2021, instead of the 100% currently applicable. This means that, in general, dividends or capital gains on the transfer of holdings of at least 5% will be subject to effective taxation at 1.25% (the 5% not exempt due to the 25% tax rate).

The technical basis of this measure is that, since positive income derived from holdings of at least 5 percent is exempted, it is logical to consider the management costs of such holdings as non-deductible, and Council Directive 2011/96/EU of 30 November 2011 on the common system of taxation applicable in the case of parent companies and subsidiaries allows Member States to set such management costs, on a flat-rate basis, at a figure not exceeding 5 percent of the profits derived from the holding.

It should be noted that in the case of “chains of companies” this minimum taxation of dividends, generally 1.25%, will be accumulated successively for each distribution of dividends, since the proposed rule makes no provision for limiting such cumulative taxation, and that this minimum taxation will also occur within consolidated tax groups.

– Furthermore, an equivalent limitation is applied in the regulation of the deduction of international economic double taxation to avoid the choice of this method instead of the exemption method in the case of income derived from holdings in entities not resident in Spanish territory.

– However, in order to allow the growth of companies which have a net turnover of less than EUR 40 million and which are not part of a trading group, such taxpayers will apply the exemption or deduction for international economic double taxation to 100% of the dividends for a period limited to three years, when they originate from a subsidiary, resident or not in Spanish territory, established after 1 January 2021.

– Finally, the exemption and elimination of international double taxation on dividends or shares in profits and on income derived from the transfer of shares in an entity whose acquisition value exceeds Euro 20 million is abolished, in order to limit the application of these measures to situations in which there is a significant shareholding of at least 5%, although a transitional regime is established for a period of five years (the holdings acquired in the tax periods commencing prior to 1 January 2021, which had an acquisition value of more than EUR 20 million without reaching the percentage of 5% holding may continue to apply the 95% exemption regime until 2025).

Value Added Tax.

– The tax rate applicable to sweetened drinks or drinks with added sweeteners is increased from the reduced rate of 10 per cent to the general rate of 21 per cent.

Tax on insurance premiums.

– The applicable tax rate is raised from 6% to 8%.

Green taxation.

– The tax credit applicable to automotive diesel is reduced in the tax on hydrocarbons.

Other measures with an impact on the application of taxes.

– The legal interest rate on money is maintained at 3% until 31 December 2021, and the interest on late payment of taxes at 3.75%.