The Central Economic Administrative Court has recently dealt with the possibility of applying the deduction for investment in new or recently created companies, provided for in Personal Income Tax, in the case of a capital increase by offsetting credits.
Article 68.1 of Law 35/2006 of 28 November 2006 on Personal Income Tax establishes a deduction for investment in new or recently created companies: “Taxpayers may deduct 30% of the amounts paid in the period in question for the subscription of shares or holdings in new or recently created companies when the provisions of numbers 2.º and 3. of this section, being able, in addition to the temporary contribution to the capital, to contribute their business or professional knowledge appropriate for the development of the company in which they invest under the terms established in the investment agreement between the taxpayer and the company. The maximum deduction base shall be 60,000 euros per year and shall be made up of the acquisition value of the shares or holdings subscribed.”
In relation to the requirements for taking the deduction, among others, it is established that the shares or holdings in the entity must be acquired either at the time of incorporation or through a capital increase carried out within three years of incorporation and remain in its assets for a period of more than three years and less than twelve years.
The wording of the above provision speaks of “sums paid”. It does not specify whether it must be a monetary contribution or not.
The Directorate General of Taxes (hereinafter DGT), in its consultation dated 27 February 2017, in a case of a capital increase by offsetting liquid, due and payable credits that the shareholders had against the company, considers that the shareholders cannot apply the deduction for investment in newly created companies, as they have not paid amounts in the capital increase:
“In the case in question, as no amounts have been paid by the subscribers of the company shares, they cannot apply the deduction provided for in the aforementioned Article 68.1 of the LIRPF on the occasion of the company’s capital increase.”
However, the Central Economic Administrative Court, in its ruling of 1 June 2020, clarified this controversy by arguing that the preamble to the Law, which established the deduction for investment in newly created companies, did so with the aim of encouraging newly or recently created companies to raise equity from taxpayers.
The Court considers that this raising of own funds can be done through monetary and non-monetary contributions:‘that purpose is obviously fulfilled if an investor makes a “monetary” contribution (arts. 63 and 299 of the L.S.C.), but this purpose is fulfilled in exactly the same way if an investor makes a “non-monetary” contribution of any kindin the incorporation or in a capital increase of a new or recently created company of entrepreneurs (arts. 64 and 300 of the Companies Act); and the same will be true if an investor contributes a claim he has against a pre-existing company that increases its capital. The commercial and accounting counterpart of any non-monetary contribution made for the incorporation or in a capital increase of any company will be an increase in its share capital, which will inevitably lead to an increase in the company’s equity”
The Court understands that the expression “amounts paid” used in Article 68.1 of the IRPF Law does not imply that the Legislator intended to refer exclusively to monetary contributions. If the Legislator had wished to restrict the application of the deduction exclusively to monetary contributions, it would have clearly stated so, incorporating that term or another similar one into the provision. The Court concludes that the DGT’s criterion restricting the application of the incentive of art. 68.1 of the Personal Income Tax Act to cases in which a “monetary” contribution is made is not appropriate. It considers that the first thing to be analysed is whether, when an investor contributes a credit to a company, the spirit and purpose of art. 68.1 of the Personal Income Tax Act is being complied with. He considers that it is complied with, since the contribution of the credit against the company itself facilitates the raising of own funds for the newly created company; which, as he will recall, is what the spirit and purpose of Article 68.1 preaches.
Therefore, when an investor provides a company with a credit against the company, he will be complying with the spirit and purpose of article 68.1 of the Personal Income Tax Law, as this contribution facilitates the raising of equity by the company.