Why it is important to do it?
It is coming to the end of the 2021 financial year in Spain and it is, therefore, important to check your business accounts.
Are more than half the assets in your company made up of real estate or securities? If so, check if the rule on patrimonial entities will apply to your business and if there is a way to change this before the end of the year.
What is the patrimonial entity?
The patrimonial entity is one in which more than half of its assets are made up of securities or assets that are not used for economic activities. You will need to check the average of the quarterly balance sheets for 2021 to ascertain this.
If you find the patrimonial entity rule applies to you, it may harm your company because:
- You will not enjoy the incentives of small companies such as accelerated amortization that allows greater depreciation expenses, or levelling reserve tax incentives
- If the company has been incorporated recently, you will not be entitled to the reduced rate of 15% in the first two years with benefits
- If the partners within the company have partnerships, it could affect their exemption from double taxation of corporate tax if they sell their shares in the company
In general, this can happen if most of your company’s assets are made up of shares, bank deposits, properties for rent or vacant properties that are not considered affected assets, that is assets used to develop an economic activity.
For instance, if you are renting out a property, there is economic activity online when at least one person is employed with a full-time contract to manage that said property.
Economic activity is defined as “the arrangement on one’s own account of the means of production and human resources or one of both for the purpose of intervening in the production or distribution of goods or services.”
If any of the above apply, check if you can take action before the year-end to avoid the patrimonial entity rule.
Ways to avoid the patrimonial entity rule
- If you have properties for rent in Spain, hire a full-time manager to look after them (provided there are enough properties to justify this), and these properties will be considered to be affected assets. The rental management could also be carried out by an external manager.
- If you participate in other companies, make sure that these interests are considered business-related. For this you need to:
- verify you own at least 5% of the capital of the companies you invest in, maintain this for at least one year and make sure said companies are not patrimonial
- Also ensure you have the minimum business structure in place to exercise the rights and fulfill the necessary obligations. For these purposes, it is not necessary to hire a worker but the business administrator can take charge of such management. You must record this function of the administrator in the statutes and assign a remuneration for it.
- Check how much money is in the business. If a large part of the assets is made up of bank deposits, try to reduce these deposits. For example, you can pay out a dividend before the end of the year, invest the money in the acquisition of affected assets, or use it to pay off pending activity debts.
Please get in touch if you have any queries about your business accounts.