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A company owned by a local council has enquired whether donating its rural properties to the council allows for patronage exemptions and tax deductions. The Directorate General for Taxes (DGT) ruled that the transaction does not constitute a donation by way of liberality, but rather a distribution of own funds to the shareholder.
Question raised - What would be the tax treatment in Corporate Income Tax for the donating corporation and what would be the resulting tax cost?
Donations made by subsidiaries in favor of their parent companies must be considered a distribution of equity (reserves, share premium, or capital). As they do not constitute an act of liberality with animus donandi, the tax incentives of Law 49/2002 do not apply. Therefore, the exemption of capital gains and the deduction in the total corporate tax liability are not applicable.
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