How is capital reduction with return of contributions to partners taxed?

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The reduction of capital is a decision that companies can take, in some cases, to resize their activity or corporate structure. We indicate whether and how it is taxed.

Taxation of a capital reduction with return of capital contributions

Capital reductions, when they involve a return of contributions to shareholders, are taxable.

Not surprisingly, we are referring to an amount that these persons receive and which, therefore, is subject to tax.

Basically, there are four tax figures: Transfer Tax (ITP) and Personal Income Tax (IRPF); if the partner is a foreigner, Non-Resident Income Tax (IRNR) could be applied. If the company is a legal entity, Corporate Income Tax (IS) will apply.

It is therefore useful to know what the different cases are, depending on their characteristics. Let us see:

1. Capital reduction: Transfer Tax (ITP).

The reduction of capital with return to shareholders is considered a transfer of assets and, therefore, is subject to transfer tax (ITP). It should be remembered that this tax, although it is a state tax, is devolved to the Autonomous Communities.

The general tax rate is 1% of the total value of the transaction. Depending on the territory, it will have to be settled in the territorial treasuries. In any case, this is one of the issues that cannot be ignored.

2. Personal Income Tax (IRPF)

Secondly, this operation is subject to personal income tax. In this sense, the criterion to be taken into account is whether there are profits, whether they are income from movable capital.

In this case, it is necessary to apply the corresponding tax rate, which will vary depending on the amount of capital gains. Let us see:

Up to 6,001 euros: 19 %.
Between 6,001 and 50,0001 euros: 21 %.
More than 50,001 euros: 23 %. This is the highest tax rate.

3. Non-Residents Income Tax (IRNR)

The IRNR is the alternative for non-residents to pay their taxes in Spain.

Those who have interests in the country also have obligations to the Spanish tax authorities.

In this case, the IRNR roughly fulfils the collection function of the IRPF, replacing it. For this type of operation, the withholding tax is 19% of the income.

4. Corporate Income Tax (IS)

This happens when the person leaving a company is a legal entity.

And this, regardless of whether we are talking about a limited company or a public limited company. In this case, it has to be governed by the corporate tax rate.

However, you may qualify for an exemption of 95% of the amount payable if you held less than 5% of the capital or if this contribution lasted for more than one year.