Corporate Tax, VAT, and Personal Income Tax: Key Exemptions

Posted on Mar 22, 2025 in Law

Corporate Tax (CT) Exemptions

In Corporate Tax (CT), exemptions can be categorized as either objective or subjective.

Objective Exemptions

Objective exemptions are granted for specific types of income and are aimed at eliminating double taxation or providing tax benefits. These exemptions are scattered throughout the articles of the Corporate Income Tax Law (LIS).

Subjective Exemptions

Subjective exemptions are granted based on the special characteristics of certain entities contributing to the CT. They are further classified into totally exempt entities and partially exempt entities.

Totally Exempt Entities

Totally exempt entities, as per Article 9.1 of the LIS, are completely relieved from CT obligations, including filing declarations and making tax payments. These entities include:

  • The State
  • Autonomous Communities
  • Local Entities
  • Autonomous Bodies of the State
  • Public Law Entities
  • Social Security Managing Entities

Partially Exempt Entities

Partially exempt entities are divided into two sub-categories:

a) Entities under Law 49/2002: These include organizations like the Spanish Red Cross, ONCE (National Organization of the Spanish Blind), the Catholic Church, foundations, and development NGOs. These entities enjoy a broad exemption covering most of their income, with the remainder taxed at a reduced rate of 10%.

b) Other partially exempt entities: Governed by special CT regimes under articles 109-111 of the LIS. This regime grants partial exemption mainly for income derived from their core activities or certain donations. Examples include:

  • Non-profit entities not eligible under Law 49/2002
  • Unions
  • Professional colleges
  • Business associations
  • Political parties
  • Mutual insurance for work accidents

Value Added Tax (VAT)

VAT, or Value Added Tax, is a consumption tax levied on the value added to goods and services at each stage of production and distribution. It is a crucial component of many countries’ tax systems and is characterized by several general aspects:

  • Taxable Transactions: VAT applies to a wide range of transactions involving the sale of goods and services. This includes the sale of products, provision of services, imports, and intra-community acquisitions.
  • Multi-stage Taxation: VAT is applied at each stage of the supply chain, from the production of raw materials to the final sale to the end consumer. At each stage, businesses collect VAT on their sales and can deduct the VAT paid on their purchases, resulting in a cascade effect.
  • Input-Output Mechanism: Businesses can usually deduct the VAT they pay on inputs (purchases) from the VAT they collect on outputs (sales). This mechanism ensures that VAT is ultimately borne by the final consumer rather than accumulating at each stage of production.
  • Taxable Base: The taxable base for VAT is generally the value added at each stage of production or distribution. This value is typically determined by the selling price of the goods or services minus the cost of inputs.
  • Tax Rates: VAT rates can vary depending on the jurisdiction and the type of goods or services. Many countries have multiple VAT rates, with standard rates applying to most goods and services and reduced rates or exemptions for essential items or specific categories.
  • Registration and Compliance: Businesses engaged in taxable activities are often required to register for VAT purposes. They must collect VAT on their sales, maintain proper records, file regular VAT returns, and remit the VAT collected to the tax authorities.
  • Administration and Enforcement: VAT administration involves tax authorities overseeing compliance, conducting audits, and enforcing tax laws to ensure that businesses adhere to VAT regulations and accurately report their tax liabilities.

Personal Income Tax (PIT)

The Personal Income Tax Law (LIRPF) establishes that the object of this Tax is the taxpayer’s income, understood as the totality of his income, capital gains and losses, and the income imputations established by law, regardless of the place where they occurred and whatever the residence of the payer. PIT is a withholding tax deducted from the gross amount.