Corporate Income Tax in Spain: a complete guide and how to pay less

How the Corporate Income Tax (Impuesto de Sociedades) works

The Impuesto de Sociedades (Corporate Income Tax, IS) taxes the income earned by legal entities resident in Spanish territory. The taxable base starts from the accounting result (profit before tax) and is adjusted with positive tax corrections (expenses recognised in the accounts that are not tax-deductible) and negative corrections (exempt income or specific IS deductions).

The simplified calculation is: Taxable Base x Tax Rate minus Deductions and Allowances equals Tax Payable. However, the key lies in the details of each step in this calculation, where there is significant scope for lawful optimisation.

Principal tax adjustments in the Corporate Income Tax

Tax adjustments are the differences between the accounting treatment and the tax treatment that modify the taxable base:

• Non-deductible provisions: Accounting provisions that the tax rules do not accept as an expense (general bad-debt provisions, liability provisions without formal litigation, and similar).
• Non-deductible expenses: Fines, surcharges, liberalities, returns on own funds and certain related-party finance charges.
• Depreciation: In some cases the tax rules permit faster depreciation than the accounting rules, which reduces the taxable base in the early years of an asset’s life.
• Offset of negative taxable bases: Tax losses from prior years may be offset without a time limit (although subject to a quantitative cap of 70% of the prior taxable base, with a minimum floor of €1 million).

Tax incentives available exclusively to SMEs

Companies with a turnover below €10 million access the special regime for Empresas de Reducida Dimensión (ERD, reduced-size companies), which includes several exclusive incentives:

The levelling reserve (reserva de nivelación) allows the taxable base to be reduced by up to 10% (maximum €1 million), deferring the tax payment for five years. The capitalisation reserve (reserva de capitalización) reduces the taxable base by 10% of the increase in equity during the year, incentivising the retention of profits in the company. Accelerated depreciation allows double the accounting depreciation to be deducted for tax purposes in the first three years of use of new fixed assets.

Documentation to retain for a potential inspection

A properly documented Corporate Income Tax return is the best defence against an AEAT inspection. You should retain for at least four years: the annual accounts with all supporting documents, the accounting books, documentation of related-party transactions with arm’s length valuations, justification for all deducted expenses, documentation supporting applied deductions (particularly R&D and innovation deductions, which require a specific technical report) and the contracts and invoices that underpin the main transactions of the year.

Corporate Income Tax instalment payments: calculation and strategy

Instalment payments on the Impuesto de Sociedades are filed in October, December and April via Modelo 202, and represent advance payments on account of the current-year tax liability. There are two calculation methods, and the choice of method has a material impact on the company’s cash flow:

Method 1 (based on the prior-year Corporate Income Tax quota): the instalment payment is 18% of the full Corporate Income Tax quota from the last assessed period. This method is straightforward but can be unfavourable where current-year profit is significantly lower than the prior year, since the company advances tax on a base that no longer reflects its actual position.

Method 2 (based on the current-period taxable base): the instalment payment is calculated on the taxable base accumulated from the start of the financial year to the last month before the payment due date (first three months for the April payment, first nine months for October, and so on). Companies with a turnover above €10 million are required to use this method. For smaller companies it is optional, but it can be advantageous when current-year profit is lower than the previous year.

Correct planning of instalment payments avoids the unnecessary advance of amounts that must then be recovered from the AEAT by way of repayment. BMC calculates and files Modelo 202 for its clients, optimising the applicable method in light of how the year is developing.

Corporate Income Tax for holding companies and the dividend exemption

The exemption regime under article 21 LIS is one of the most significant incentives for company groups and holding structures in Spain. The exemption, which was 100% until 2021, was reduced to 95% by Ley 27/2021 (effective from 2022 with a phased introduction), meaning that 5% of dividends or capital gains received from investee companies are subject to Corporate Income Tax.

To apply the exemption, the receiving company must hold at least 5% of the capital of the investee, or a holding whose acquisition cost exceeds €20 million, and must have maintained that holding for at least one year (or commit to maintaining it). In addition, the investee must not be resident in a jurisdiction classified as a non-cooperative territory. Following Orden HAC/649/2026 (BOE 27-jun-2026), Gibraltar was removed from the list of non-cooperative jurisdictions with effect for Corporate Income Tax from tax periods beginning on 1 de enero de 2027; Gibraltar investees may therefore satisfy this article 21 LIS requirement from that date, provided they also pass the controlled foreign company (TFI, transparencia fiscal internacional) analysis, since Gibraltar’s corporate tax rate of 15 % remains below the 18,75 % threshold (75 % of the general Spanish rate).

The 95% exemption applies both to dividends distributed by the investee and to capital gains arising on the transfer of the holding. For company groups, this exemption makes intra-group dividend distributions very lightly taxed (only 5% effective taxation), making it very efficient to concentrate profits in the holding company for subsequent distribution or reinvestment.

Corporate Income Tax in M&A transactions

Mergers, demergers, contributions of assets and share exchanges are corporate restructuring transactions that benefit from a special Corporate Income Tax regime (articles 76-89 LIS, tax-neutral restructuring regime). This regime allows such transactions to be carried out without triggering tax on the latent gains in the transferred assets or holdings, provided there is a valid economic reason for the transaction.

The deferral of taxation is not permanent: assets received in the restructuring retain the tax basis they carried before the transaction (continuity of tax basis), so the deferred gain will crystallise when the assets are sold to third parties. The AEAT may deny the neutral restructuring regime if it considers that the principal or one of the principal objectives of the transaction is tax fraud or evasion, which in practice requires the taxpayer to document adequately the economic reason justifying the restructuring.

BMC plans its clients’ M&A transactions by identifying the most efficient structure from a Corporate Income Tax perspective, coordinating the tax due diligence, and ensuring that the documentation of the valid economic reason is robust against a potential AEAT review.

The deduction for investment in audiovisual productions and live performances

The deduction for investment in film productions and audiovisual series (article 36 LIS) is one of the largest Corporate Income Tax incentives in Spain and also one of the least known outside the creative sector. However, through the mechanisms for transferring the deduction, any company can benefit from it as an investor in these productions.

The producer that makes the investment can generate deductions of 30% on the first €1 million of the deduction base and 25% on the excess, subject to a limit of 50% of the tax quota (or 25% under the general regime). Where the production cannot apply the full deduction in the year in which it arises, it may transfer it to a third-party financier (the so-called tax credit transfer), which has created a market for the acquisition of these deductions by large companies with high Corporate Income Tax quotas.

For companies outside the audiovisual sector, acquiring tax credits of this nature requires rigorous legal and tax analysis to verify that the investment structure meets the legal requirements and that the AEAT cannot reject the deduction in a subsequent inspection. BMC analyses these opportunities for clients with high Corporate Income Tax quotas who are seeking ways to improve fiscal efficiency within the legal framework.

Controlled Foreign Company rules (TFI): obligations for holding companies

Spanish companies that hold interests in foreign entities situated in low-tax territories are subject to the Transparencia Fiscal Internacional (TFI) rules regulated in article 100 LIS. These rules require passive income (interest, dividends, royalties, property income) earned by the foreign entity to be included in the Spanish taxable base, as if those were income earned directly by the Spanish company.

The TFI rules apply where the foreign entity is taxed at a rate below 75% of the Spanish Corporate Income Tax rate (that is, below 18,75 %), unless the entity is in a country with which Spain has signed a Double Taxation Convention including an exchange of information clause. For Spanish holding companies with interests in entities in the UAE, the Cayman Islands, Bermuda or any other low-tax territory, TFI analysis is mandatory before distributing profits or structuring income flows. Gibraltar, although removed from the list of non-cooperative jurisdictions by Orden HAC/649/2026 with effect for tax periods starting 1-ene-2027, remains subject to TFI since it taxes at 15 %, below the 18,75 % threshold: TFI applicability depends on the effective tax level, not on the non-cooperative jurisdiction list.

Correct TFI planning involves verifying whether the foreign entity’s income is active in nature (and therefore outside the TFI scope), whether a Double Taxation Convention excludes TFI application, or whether the entity has sufficient real economic substance with its own material and human resources. BMC manages TFI analysis for holding companies with international structures, preparing the required reports and documenting the tax position to reduce inspection risk.