Your company distributed an interim dividend at the end of last year, how does this affect the capitalisation reserve for tax purposes?

The capitalisation reserve. As you know, companies can benefit from a 10% reduction in their Corporate Income Tax (IS) on the amount by which they increase their equity:

• This increase is the positive difference between shareholders’ equity at the end of the financial year (excluding the results of the financial year itself) and that of the previous year (also excluding profits).
• In this calculation, certain items, such as contributions from shareholders, capital increases, the equalisation reserve or statutory or legal reserves, should not be included as own funds.

Interim dividends. Therefore, such an increase is usually the part of the previous year’s profit that has not been distributed and has been allocated to voluntary reserves.

However, what happens if interim dividends have been distributed during the year, and how is this increase affected if such dividends are counted as a reduction in equity?

What is not computed? Well, the Central Economic-Administrative Court (TEAC) has established the following criterion when determining the capitalisation reserve:

• When calculating the equity at the end of each financial year, the profits of that period must be deducted.
•  Thus, interim dividends paid out do not have to be deducted as they already form part of the profits which have been deducted when calculating the equity at the end of the financial year. Deducting them again would mean deducting the same dividends twice.

For example. A company’s eligible own funds at the end of 2020 and 2021 are EUR 150,000 and EUR 162,000, while profits are EUR 40,000 and EUR 30,000, respectively. At the end of 2021, interim dividends of €18,000 were distributed:

Concept	Amount
Own funds 2021 – Profit 2021	150.000 (162.000 – 30.000 + 18.000)
Own funds 2020 – Profit 2020	110.000 (150.000 – 40.000)
Basis of reduction	40.000
Capitalisation reserve reduction (10%)	4.000

Although interim dividends paid reduce own funds, they should not be deducted when calculating the increase in own funds.