Financial expenses: What are they and how are they deducted?
Posted: Wed Dec 18, 2024 6:06 am
In this post we tell you everything you need to know about financial expenses. Also, to what extent the interest on debts is deductible and what their main limitations are.
The deductibility of interest and other financial expenses is limited.
The main limitations affect operations with group companies and abroad.
Financial expenses are a fundamental element of the profit and loss account . They are mainly, but not exclusively, focused on the cost of external financing, such as interest on different types of debt.
Download the FREE guide “Learn to manage your cash flow like an expert”
In 2012, a path of change in the taxation of financial expenses began , which, after some reforms, continues today. Specifically, its purpose was, in addition czechia email list to increasing revenue, to prioritize own financing over external financing . Let's see how it works.
What are financial expenses in accounting?
Financial expenses correspond to the following categories of accounts reflected in subgroup 66 of the chart of accounts of the General Accounting Plan:
Concepts necessary to understand the deductibility of financial expenses
In order to understand what part of financial expenses is deductible in corporate tax, it is necessary to understand some concepts defined by the tax law.
A first fiscal approach
On the occasion of the first moments of application of the deductibility of financial expenses, the General Directorate of Taxes approved a resolution . In it, it emphasized that the concept must be understood taking into account the meaning and purpose of the regulation that imposed this limit.
Specifically, it is estimated that, since what was sought was to reward own financing over external financing, the financial expenses and income of which we speak must be related to indebtedness .
Financial expenses with limited deductibility are those related to debts.
Therefore, adjustments such as the following would be made:
In the event of a deterioration in the value of credits , we would exclude from the financial expense the part that corresponds to the principal of the debt.
We would only consider as financial income or expense the exchange rate differences related to the debt .
Not all financial coverages will be computed , but only those that cover the entity's debts that are recorded in the profit and loss account for the year.
The positive or negative results that correspond to the non-managing participant of a participation account are charged as financial income or expenses . This affects both the managing and non-managing participant.
Net financial expenses
To calculate them, the following concepts must be subtracted from the expenses :
Financial income derived from the transfer of own capital to third parties . These are usually interests on debts that others have with us.
Certain service expenses related to transactions carried out in tax havens . However, they can be deducted if we prove that the expense corresponds to an operation actually carried out.
Debt expenses with group companies intended for certain acquisitions or contributions also related to group companies.
Non-deductible expenses related to hybrid mismatches . These are related to operations involving a related person or entity resident in another country or a permanent establishment. They attempt to avoid cases in which there may be a tax relief in both countries without including income in either.
Operating profit
To calculate the operating profit as defined in the third paragraph of article 16.1 of the tax law, we will take three steps :
The allocation of non-financial fixed assets and other subsidies .
Impairment and results from disposals of fixed assets .
3. Next, we add the financial income from participations in equity instruments that meet the following conditions:
They must correspond to dividends or profit sharing of participating entities.
The percentage of participation , direct or indirect, must be greater than 5% .
The shares must not have been acquired with debts with entities of the group whose financial expenses are not deductible.
How to calculate deductible financial expenses
On the one hand, there is a double limit :
Net expenses will be deductible up to a limit of 30 percent of the operating profit for the year .
In any case, net financial expenses of the tax period amounting to one million euros will be deductible . If the tax period is less than one year, the limit will be adjusted proportionally.
Net financial expenses that have not been deducted may be deducted in subsequent tax periods . They must be added to those of the corresponding year in which we intend to deduct them, and the limit must still be respected.
The opposite may also occur: net financial expenses do not reach the limit . In this case, the difference may be added to the limit in the five immediate and subsequent years.
In this regard, in a note , the Tax Agency has defended the following interpretation : "in the event of an operating profit from a tax period that has not determined the deductibility of the net financial expense in that period, the difference between the two will be added to the limit of 30 percent of the operating profit of any of the tax periods that end in the following 5 successive years, constituting a joint limit that will be applied before the minimum limit of 1 million euros.
Therefore, it is only after the net financial expenses of the tax period have exceeded this joint limit that the minimum limit of 1 million euros will come into play.”
The deductibility of interest and other financial expenses is limited.
The main limitations affect operations with group companies and abroad.
Financial expenses are a fundamental element of the profit and loss account . They are mainly, but not exclusively, focused on the cost of external financing, such as interest on different types of debt.
Download the FREE guide “Learn to manage your cash flow like an expert”
In 2012, a path of change in the taxation of financial expenses began , which, after some reforms, continues today. Specifically, its purpose was, in addition czechia email list to increasing revenue, to prioritize own financing over external financing . Let's see how it works.
What are financial expenses in accounting?
Financial expenses correspond to the following categories of accounts reflected in subgroup 66 of the chart of accounts of the General Accounting Plan:
Concepts necessary to understand the deductibility of financial expenses
In order to understand what part of financial expenses is deductible in corporate tax, it is necessary to understand some concepts defined by the tax law.
A first fiscal approach
On the occasion of the first moments of application of the deductibility of financial expenses, the General Directorate of Taxes approved a resolution . In it, it emphasized that the concept must be understood taking into account the meaning and purpose of the regulation that imposed this limit.
Specifically, it is estimated that, since what was sought was to reward own financing over external financing, the financial expenses and income of which we speak must be related to indebtedness .
Financial expenses with limited deductibility are those related to debts.
Therefore, adjustments such as the following would be made:
In the event of a deterioration in the value of credits , we would exclude from the financial expense the part that corresponds to the principal of the debt.
We would only consider as financial income or expense the exchange rate differences related to the debt .
Not all financial coverages will be computed , but only those that cover the entity's debts that are recorded in the profit and loss account for the year.
The positive or negative results that correspond to the non-managing participant of a participation account are charged as financial income or expenses . This affects both the managing and non-managing participant.
Net financial expenses
To calculate them, the following concepts must be subtracted from the expenses :
Financial income derived from the transfer of own capital to third parties . These are usually interests on debts that others have with us.
Certain service expenses related to transactions carried out in tax havens . However, they can be deducted if we prove that the expense corresponds to an operation actually carried out.
Debt expenses with group companies intended for certain acquisitions or contributions also related to group companies.
Non-deductible expenses related to hybrid mismatches . These are related to operations involving a related person or entity resident in another country or a permanent establishment. They attempt to avoid cases in which there may be a tax relief in both countries without including income in either.
Operating profit
To calculate the operating profit as defined in the third paragraph of article 16.1 of the tax law, we will take three steps :
The allocation of non-financial fixed assets and other subsidies .
Impairment and results from disposals of fixed assets .
3. Next, we add the financial income from participations in equity instruments that meet the following conditions:
They must correspond to dividends or profit sharing of participating entities.
The percentage of participation , direct or indirect, must be greater than 5% .
The shares must not have been acquired with debts with entities of the group whose financial expenses are not deductible.
How to calculate deductible financial expenses
On the one hand, there is a double limit :
Net expenses will be deductible up to a limit of 30 percent of the operating profit for the year .
In any case, net financial expenses of the tax period amounting to one million euros will be deductible . If the tax period is less than one year, the limit will be adjusted proportionally.
Net financial expenses that have not been deducted may be deducted in subsequent tax periods . They must be added to those of the corresponding year in which we intend to deduct them, and the limit must still be respected.
The opposite may also occur: net financial expenses do not reach the limit . In this case, the difference may be added to the limit in the five immediate and subsequent years.
In this regard, in a note , the Tax Agency has defended the following interpretation : "in the event of an operating profit from a tax period that has not determined the deductibility of the net financial expense in that period, the difference between the two will be added to the limit of 30 percent of the operating profit of any of the tax periods that end in the following 5 successive years, constituting a joint limit that will be applied before the minimum limit of 1 million euros.
Therefore, it is only after the net financial expenses of the tax period have exceeded this joint limit that the minimum limit of 1 million euros will come into play.”