The final quarter of the year is the key moment for adopting tax decisions that can make a difference in Corporate Income Tax and Personal Income Tax settlements. Year-end tax planning is not about avoiding obligations, but about legally using all the tools that regulations make available to companies and taxpayers.
Corporate Income Tax Close
The main decisions to be made before 31 December include: materialising investments that generate deduction rights (R&D&i, electric vehicles, renewable energy, film productions); reviewing impairment of inventories and assets to apply negative adjustments to the base; analysing whether to constitute or increase the Capitalisation Reserve or the Equalisation Reserve (for SMEs); and verifying the recoverability of pending negative taxable bases to be offset.
The Capitalisation Reserve (Article 25 CIT Act) allows the taxable base to be reduced by 10% of the increase in equity in the period, provided it is maintained for five years. For a company with a taxable base of 500,000 euros and an equity increase of 100,000 euros, the 10,000 euro base reduction represents a tax saving of 2,500 euros. This reserve is compatible with the Equalisation Reserve.
The Equalisation Reserve (Article 105 CIT Act, exclusive to SMEs) allows the taxable base to be reduced by up to 10%, with an absolute limit of one million euros. The amount allocated can offset losses in the following five periods; if there are no losses, it automatically reverses after five years. This tool is particularly useful for companies with positive taxable bases that anticipate periods of lower profitability.
Depreciation and Provisions
The year-end is the time to review asset depreciation criteria. Companies can opt for accelerated depreciation of certain assets (such as R&D assets, digital economy assets or alternatively-powered vehicles), which brings forward the tax deduction. For assets acquired during the period, ensuring that they are put into service before 31 December is essential to apply a full year’s depreciation.
Bad debt provisions (customers with unpaid debts more than six months old) are tax-deductible under the requirements of Article 13 of the CIT Act. It is worth reviewing the debtor portfolio before year-end and establishing provisions for those debts that meet the requirements. For debts below 300 euros, deductibility is automatic with any claims procedure.
Personal Income Tax Planning
Self-employed professionals and partners with capital income must analyse: the advisability of advancing or deferring receipts and payments to optimise the return result; possible pension plan contributions (up to the 1,500 euro base reduction limit); and pending capital gains and losses to offset negative balances from previous years.
Individual pension plan contributions have a base deduction limit of 1,500 euros per year. However, employer contributions to occupational pension plans extend this limit by a further 8,500 euros, making these instruments a highly tax-efficient form of benefits in kind.
For self-employed professionals, it is worth analysing whether to bring forward deductible expenses before the year-end close (material purchases, IT equipment, advertising) rather than deferring income to January. If the period result is higher than expected, bringing forward expenses and deferring income reduces the 2023 IRPF base; if the result is lower than expected, the opposite strategy may be more appropriate.
Crypto-Assets: Special Considerations
Taxpayers with crypto-asset positions must review their unrealised gains and losses to make realisation decisions before the year-end. Offsetting gains against losses from other assets can optimise the tax burden.
Gains and losses from crypto-asset transfers are taxed as capital gains in the savings base, at rates of 19% (up to 6,000 euros), 21% (between 6,000 and 50,000 euros), 23% (between 50,000 and 200,000 euros) and 26% above 200,000 euros. If significant gains have been generated in crypto-assets, it is worth assessing whether there are unrealised losses in other assets (investment funds, shares, real estate) that can be offset in the same period.
For the purposes of Modelo 721 (informational declaration of crypto-assets abroad), taxpayers holding crypto-assets on foreign exchanges with a value exceeding 50,000 euros must file the declaration between January and March of the following period, regardless of whether any transactions have been carried out.
Other Relevant Year-End Measures
Charitable donation deduction: donations to foundations and non-profit entities under Law 49/2002 generate a tax credit of 35% (80% for the first 150 euros), increasing to 40% if donations have been made to the same entity in the two previous periods.
Electric vehicles: the purchase of new electric or hydrogen fuel cell vehicles gives rise to the environmental investment deduction, at a rate of 15% of the investment.
Entertainment and client hospitality expenses: verify that such expenses do not exceed 1% of turnover, the limit established in Article 15 of the CIT Act for full deductibility.
CIT advance payments: if the company belongs to a group with turnover exceeding ten million euros and calculates the advance payment on the actual period base (Article 40.3 CIT Act), the December payment must be calculated using data accumulated to 30 November. A realistic projection of the annual result allows the payment to be adjusted, avoiding both overpayment (with a financial cost) and underpayment (with interest surcharges).
At BMC we carry out personalised year-end tax reviews. See our tax planning services.
