In Spain, companies showing profit in their last Corporation Tax filed, are required to make advance payments for their next Corporation Tax, in three instalments a year: in April, October, and December. These payments can be calculated using two methods outlined in Articles 40.2 and 40.3 of the Corporation Tax Law. Choosing the appropriate method depends on a company’s financial situation (in profit) and turnover.
Article 40.2 Method:
This is the default method and instalments are based on the application of a flat rate of 18% of the last corporation tax paid, excluding the advance corporation tax payments made, hence typically 18% of the box 599 of the last corporation tax declaration filed by the company. Nice and easy, this approach offers simplicity, based upon known figures from the previous year, making it predictable and easier to manage.
However, it may not accurately reflect the current year’s financial performance, especially if there are significant changes in the current or expected profits to be made by the company, compared to the previous year.
Article 40.3 Method:
Alternatively, this method calculates instalments based on the taxable income of the current year up to the month prior to the payment date (eg March for April payment). The percentages applied differ depending on the company’s turnover amd the corporation tax rate applicable. Basically, the tax rate is 5/7ths of the corporation tax rate:
- For companies with a turnover below 1€ million in the preceding 12 months, the instalment is determined using the current reduced tax rate of 23%, to give an applicable percentage of 16%.
- For companies with a turnover between 1 and 10 million Euros in the preceding 12 months, the instalment is determined using the standard tax rate of 25% to give an applicable percentage of 17%.
- For companies with a turnover of 10€ million or more, the instalment is determined using the standard tax rate of 25% to give an applicable percentage of 24%.
This method aligns payments more closely with the company’s current financial performance, which can be advantageous for cash flow management. However, it requires accurate and up-to-date accounting records throughout the year. Additionally, these instalments take into account the payments already made for the corresponding tax year and are therefore calculated on an accumulated basis.
Choosing Between the Methods:
The choice between these methods depends on several factors:
- Turnover Threshold: Companies with a turnover exceeding 6€ million in the previous year are mandated to use the Article 40.3 method.
- Predictability vs. Accuracy: The Article 40.2 method offers predictability based on past performance, which can be beneficial for budgeting. In contrast, the Article 40.3 method provides a more accurate reflection of the current year’s profitability, which can prevent overpayment or underpayment of taxes.
- Administrative Capability: The Article 40.3 method requires real-time financial data, necessitating robust accounting systems. Companies with less sophisticated accounting practices might prefer the simplicity of the Article 40.2 method.
In conclusion, while the Article 40.2 method offers simplicity and predictability, the Article 40.3 method provides a payment structure that mirrors the company’s current financial status. Companies should assess their turnover, financial stability, and administrative capabilities when selecting the most appropriate method for calculating their CIT advance payments.
Additionally, choosing the method to apply can only be actioned with the Tax Office in February of each year. Therefore, once a method is chosen, the company is beholden to that method for the entirety of all instalments for the corresponding tax year.
