Tax Content in a Company´s Annual Report: ¿Should I Include It?

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As a general rule, companies are required to include certain tax-related information in the Notes to their Annual Financial Statements.
Providing adequate detail of tax information within the Annual Financial Statements can be beneficial to clarify any doubts that the Authorities may have and thus avoid information requests or, if applicable, expedite verification or inspection processes.
Furthermore, in many cases, the lack of mention in the Notes may result I the imposition of penalties or the impossibility of applying certain tax benefits.

Follow the link for more details on mandatory disclosures.

Company Notes – Tax Situation

This note includes the minimum reporting requirements about the entity´s tax position:

  • Reconciliation between the accounting profit and the taxable income, detailing permanent and temporary differences.
  • Corporate Income tax settlement, explaining and reconciling the income tax expense / revenue.
  • Breakdown of the income tax expense or income, differentiating between current tax and deferred tax.
  • Detail of assets and liabilities for deferred taxes.
  • Amount and timing of application of deductible temporary differences and other tax credits.
  • Amount of taxable temporary differences on investments in subsidiaries, associates and joint ventures.
  • Nature, amount, and commitments acquired in relation to tax incentives applied during the fiscal year.
  • Information on taxes payable to different tax jurisdictions and withholdings.
  • Identification of other permanent differences.
  • Changes in tax rates and their effect on deferred taxes.
  • Information on tax provisions and contingencies, as well as post-closing events.
  • Any other relevant circumstanced in relation to the tax situation.
  • Information on other taxes and significant tax contingencies.
  • Características o regímenes especiales – Types of special regimes for companies:

    Companies that form a Commercial Group under Article 42 of the Companies’ Act.

    As a general rule, if a company is part of a Commercial Group, this information must be reflected in the financial statements. This detail is important because the application of certain regimes of incentives depends on whether or not a company is part of a Commercial Group or on the volume of the group as a whole.

    – SME Regime

    The classification of a company as an SME for accounting purposes does not imply that this company can benefit from the tax regime for small-sized enterprises. Therefore, if this regime is applicable, it is recommended that it be mentioned in the Financial Statements for informational purposes, at least during the first year in which it is applicable.

    – Participative Loans

    It is recommended to include in the financial statements the granting of participative loans during the year, for the purpose of overcoming a potential cause of dissolution, among other reasons, due to the importance of the date of their granting for the purpose of applying certain regimes such as the tax consolidation regime.

    – Capitalisation reserve

    This consists of a reduction in the taxable base of 10% of the amount of the increase in its equity, provided certain requirements are met, including the establishment of a reserve for the amount of the reduction, which must be shown in a balance sheet with absolute separation and an appropriate title and will be unavailable for the period specified in the proceeding paragraph.

    It is recommended to include a mention to this effect in the financial statements.

    – Holding Companies

    In the case of companies that have been taxed under the fiscal transparency regime, if there are still reserves endowed with profits corresponding to fiscal periods in which they taxed under said regime (repealed in 2007), they must make reference to this in the financial statements, including a detailed breakdown of the balances and movements of reserves for this purpose.

    – Voluntary Accounting Revaluations

    If the entity carries out voluntary accounting revaluations that are not included in the taxable base, it must include in the financial statements a mention of the affected elements, the fiscal period in which they were carried out, and the amount of the revaluation until the elements cease to be part of the company’s assets.

    – Special SOCIMI Regime

    Entities applying this regime must create a section in the financial statements entitled “Information Requirements Derived from the SOCIMI Condition, Law 11/2009”, where they must refer to reserves (both before and after the application of the regime), dividends distributed (both from profits and from reserves), acquisition dates of properties leased or capital participations, and identification of assets included within the 80% of this Law.

    – Balance Sheet Updates (2012 y 1996)

    Entities that have updated the values of their balance sheets due to authorization granted in 1996 by Royal Decree-Law 7/1996 or in 2012 by Law 16/2021 must include information regarding the updating criteria, their amount, and movements in the revaluation reserve account during the fiscal years in which the assets whose value has been updated are included in the company’s equity.

    – Investment Reserves in the Canary Islands

    Entities applying this tax incentive must disclose in the financial statements the amount of allocations made to the reserve indicating the fiscal year in which they were made, the amount of the reserve pending materialization, the amount and date of the investments, whether or not they are made prior to the allocation, as well as any other tax benefit accrued on each investment made as a result of the reserve or subsidy requested or granted.

    – Foreign Securities Holding Entities (ETVE)

    Opting for this regime entails the obligation to include in the financial statements a section entitled “Information Required by Article 108 of Law 27/2014, of November 27”, detailing the amount of exempt income and taxes paid abroad related to these.

    – Economic Interest Groupings (AIE) and Temporary Business Associations (UTE)

    They must include in the financial statements, information about the generated profits and their taxation method. Specifically, profits allocated to reserves must be differentiated between those corresponding to periods in which the general or special regime was applied. Likewise, regarding these reserves, they must distinguish between those corresponding to resident or non-resident partners in Spanish territory, including, if applicable, details of the distribution of dividends charged to these reserves.

    – Operations Subject to the Fiscal Neutrality Regime

    Acquiring entities involved in these operations must include in their annual financial statements the following information:

    • Fiscal period in which the transferring entity acquired the assets.
    • Last balance sheet closed by the transferring entity.
    • List of acquired assets with accounting values different from those previously recorded in the transferring entity.
    • List of tax benefits enjoyed by the transferring entity, in respect of which the acquirer must meet certain requirements.

    If the transferring entity renounces the total application of the fiscal neutrality regime, the acquiring entity is only obliged to mention in the annual financial statements the information relating to the tax benefits. However, in situations of partial waiver, all mentioned obligations must be fulfilled, except for the elements whose income has been included in the taxable base at their fair value.

    Transferring entities are required to communicate to the acquiring entity the necessary data to fulfill these obligations.

    Corporate partners must mention in their annual financial statements the accounting and fiscal value of the securities delivered, as well as the accounting value of the securities received.

    It should be noted that this obligation of information through the financial statements must be maintained during the fiscal years in which the acquired elements remain in inventory or the requirements derived from the tax incentives enjoyed, if any, by the transferring entity must be met.

    For practical purposes, the acquiring entity will include this information in the financial statements for the fiscal year in which the operation takes place within the “Business Combinations” Note. In the second and subsequent fiscal years, the entity may include a mere indication that such mentions are included in the first annual financial statements approved after the operation, and this information will be included in Note 12 of “Tax Situation”.

    Related Party Transactions and Balances

    The financial statements must contain a detailed breakdown of transactions with related persons and companies, as well as the outstanding balances at the end of the fiscal year. It is important to review this information as companies with related party transactions are required to submit certain forms to the Tax Agency and the information must be coherent.

    For further details on these accounting information obligations and their proper compliance, please do not hesitate to contact us.

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