Period for reviewing negative tax bases
Patrick Gordinne Perez2024-11-23T11:56:32+00:00Time limit for reviewing tax losses: if there are tax losses that have not yet been offset, the tax authorities may review them beyond the general limitation period.
However, certain limits must be respected in order to do so.
Offsetting of tax losses
Limit on offsetting tax losses
When a company generates a negative tax base (BIN), it can offset it against the positive tax bases of the following years (a tax credit is generated in favour of the company).
This offsetting can be carried out without any time limit.
Quantitative base netting limit
However, the BIN that can be offset in each financial year is limited to the higher of the following two amounts :
- EUR 1 million. Tax losses below this amount can be offset in full (provided that the positive tax base is sufficient).
- 70% of the negative taxable income prior to the reduction for the capitalisation reserve and the offsetting of the positive taxable income itself.
Remember that the regulation that established that this limit was 50% for companies with a turnover of between 20 and 60 million euros and 25% for companies with a turnover of more than 60 million euros was annulled as unconstitutional.
Tax inspection
General verification period: four years
Inspection limitation period
Since the generation of a negative tax base is done through the self-assessment of the corporate income tax (IS) for a given year, the tax authorities have the right to check whether the self-assessment and the BIN are correct.
If an error is detected, the self-assessment – as well as the negative tax base – can be regularised within the general limitation period of four years (from the end of the deadline for filing the self-assessment).
Offsetting of tax losses example 1
In the corporate income tax self-assessment for 2021 your company declared a tax loss of 200,000 euros – sales were reduced and your company made a loss.
Since the deadline for the tax return was 25 July 2022, the tax authorities have four years (until 25 July 2026) to initiate an audit of the 2021 income tax return and, if necessary, adjust the negative tax base.
This adjustment will also affect the parts of the negative tax base that may have been offset in the tax returns of subsequent years, which the tax authorities can also check.
Special deadline: ten years
Generated in a prescribed year
However, what happens if the limitation period for the IS self-assessment in which a negative tax base was generated has already elapsed – more than four years have passed – and it has not been possible to offset it in full?
Special time limit
However, the tax authorities can still check it. In this case, a special period of time comes into play during which the tax authorities can check whether the negative tax base was calculated correctly in the prescribed year in which it arose.
However, it can only carry out this verification for the purpose of adjusting the incidence of the negative tax base in respect of non-prescribed tax years.
This special period is ten years from the end of the tax filing period of the year in which the negative tax base was generated.
So, if your company has a tax loss carry forward from tax years that have expired, do not destroy the accounting and ancillary documentation (invoices, delivery notes, bank statements, contracts, etc.) for those years: if the tax authorities check it, they may ask you for it.
Offsetting tax losses Example 2
In the 2017 income tax return – the deadline for which ended on 25 July 2018 – your company generated a large negative tax base, which has been offset in 2018 and 2019 (prescribed years) and between 2020 and 2023 (non-prescribed years).
Well, if the tax authorities start an inspection in 2024, thanks to this special ten-year period, they will be able to request all the accounting documentation for 2017 to check whether the BIN was calculated correctly.
However, if, as a result of this check, it considers that the negative tax base was not calculated correctly:
- You will only be able to regularise its subsequent effect with regard to the IS of the non-prescribed years (from 2020 to 2023).
- However, you will have to accept the compensations made in the tax years for which the statute of limitations has already expired (2018 and 2019).
More than ten years: accreditation
Self-assessment and accounting
Once the ten-year period has expired, the tax authorities’ right to check the negative tax base is time-barred and they can no longer check the self-assessment for the year in which it was generated.
However, you may require your company to prove that the BIN exists.
In this case, it will be sufficient for you to provide the IS self-assessment for the period in which it was generated, as well as the accounts (with proof that they have been filed with the Commercial Registry).
It should be understood that the term “accounting” refers to the annual accounts, and not to the accounting books (since after ten years there is no longer any possibility of verification and the BINs only need to be accredited).
It is therefore advisable to disclose in each year’s annual report the BINs that are generated and the BINs to be offset.
The Spanish tax authorities can check the tax losses of the previous ten tax years with a view to correcting their effects in non-prescribed tax years.
However, in doing so, it must apply the principle of full adjustment.
Controversial situation
Two inspection, no.
Some controversies may arise in these cases.
Thus, it is common for tax losses to have been reviewed by the tax authorities in a limited audit of the year in which they were generated and then, once that year has expired, the tax authorities seek to review them again in an inspection within the ten-year period.
This is not correct: unless new facts or circumstances are discovered, the tax authorities cannot question these tax credits when they have already been reviewed in a previous limited verification procedure.
Asymmetrical procedure
Another aspect to be taken into account is that, while the general four-year period is symmetrical (both the tax authorities and the taxpayer can correct the amount of tax losses generated in non-prescribed years), the ten-year period is asymmetrical.
In other words, this second period can only be used by the tax authorities to check the IS of a year that is not yet statute-barred, with the aim of regularising tax losses generated in statute-barred years that are intended to be offset.
Offsetting tax losses Example 3.
By mistake, your company did not correctly calculate the BIN declared in the IS for the 2017 tax year.
Well, although your company can no longer rectify this declaration or the BIN declared as it is a prescribed year, the Tax Authorities could regularise it, taking advantage of the special verification period of ten years.
Full adjustment
Another relevant question is whether the tax authorities are also subject to the principle of full adjustment when assessing tax losses from tax loss carry-forwards within the ten-year period.
According to this principle, the adjustment must take into account all the consequences, whether favourable or unfavourable to the taxpayer.
The courts have established that this principle should also apply in these cases.
Offsetting of tax losses example 4
Your company is subject to an inspection in the year 2023, and it turns out that in that year you offset a negative tax base from the year 2018, which is already time-barred. In this case:
- If the tax inspectorate detects that in 2018 your company deducted an expense that was not deductible, you can regularise this negative taxable base for 2018, increasing the tax payable for the IS for 2023.
- However, if in that same year the company also declared income that did not correspond, the Tax Authorities must take this circumstance into account in your favour when adjusting the negative tax base for 2018.