Non-profit associations will be taxed on grants that finance economic activities

The nature of the income received by non-profit entities is a determining factor for its tax treatment in Corporate Income Tax (IS). Recently, the Directorate General of Taxes (DGT) has clarified the scope of the exemption applicable to grants, establishing a critical distinction based on the destination of said funds.

What the DGT has resolved

The ruling establishes that the income of non-profit entities enjoys an exemption as long as it proceeds from their specific object or purpose and does not derive from economic activities. In this sense, the criterion focuses on the purpose of the grant:

• Exempt income: Those grants that finance actions constituting the purpose of the association, without these constituting an economic activity.
• Taxable income: Those grants intended to finance activities that involve the organization of means to produce or distribute goods or services, which is classified as an economic activity.

This criterion is based on the application of Law 49/2002 and the Corporate Income Tax Law (LIS).

What it means for you

For non-profit entities, receiving public or private funds does not automatically guarantee tax exemption. The tax impact will depend on the traceability and destination of each item received. If a grant is used to cover operating expenses that are part of the entity's social purpose, the income will not be taxed. However, if the funds are used to sustain a structure that allows the commercialization of products or the provision of services in an organized manner, the entity must include that grant in its Corporate Income Tax taxable base.

What should be done

It is necessary to perform a detailed analysis of the regulatory bases of the grants received and the way the funds are executed. The correct distinction between the social purpose and the economic activity is fundamental to avoid tax contingencies. It is recommended to precisely document the allocation of each grant to exempt activities to justify its treatment before the Tax Administration.