Donations to Ukraine: a review of the corporate income tax treatment in Spain and Poland
Spain and Poland Tax Commentary
Since the start of the invasion of Ukraine, many companies have been making donations to support relief efforts following the invasion. In this commentary we review the main corporate income tax implications of these donations for Spanish or Polish resident donor legal entities.
- Under article 15 of the Corporate Income Tax Law, donations do not trigger deductible expenses for corporate income tax purposes.
- However, Law 49/2002, of December 23 on the tax regime for not-for-profit entities and on tax incentives for patronage provides (in article 17) that donations are eligible for tax credits where certain requirements are met.
- Briefly, the requirements are that they have to be pure and simple, irrevocable donations or contributions to any of the not-for-profit entities defined in the law itself; including gifts and donations in cash or in other types of assets or rights.
The tax credit base is the amount gifted, for donations in cash, and the carrying amount of the assets and rights, for donations in kind. The law lays down specific valuation rules for gifts of usufruct rights in rem, securities and other assets or rights. The value of gifted items is limited in all cases to the fair market value of the transferred assets or rights at the time of their transfer.
Additionally, the tax credit base cannot exceed 10% of the tax base for the taxable period. Any amounts over and above that limit may be used in the immediately following 10 year period.
The tax credit, which will reduce gross tax payable after deducting amounts of relief (bonificaciones), double taxation tax credits and tax credits for the performance of certain activities, is determined by calculating 35% of the tax credit base (it must be recalled that the standard corporate income tax rate is currently 25% and that the standard minimum tax liability is equal to 15% of the tax base, reduced by certain reductions, types of relief and tax credits, but not by the tax credit for donations itself).
If in the two immediately preceding tax periods, eligible donations or gifts were made to the same entity in an amount that in each of the two periods is equal to or higher than any made in the previous year, the tax credit due to donations to that entity will be equal to 40%. It needs to be remembered for these purposes that donations to the same entity may have multiple uses and that, as we have mentioned, they must be pure and simple gifts, namely with no conditions attached. In other words, if donations have been made to the same NGO over several years, this increased tax credit may be applied, even if the NGO has used the donations for different projects or beneficiaries.
Any amounts that cannot be deducted in the period in which the donations are made can be used in the immediately following ten year period.
- To be eligible for the tax credit, donations will have to be made to (among others) foundations, associations with recognized public benefit status or any of the non-governmental development organizations referred to in Law 23/1998, of July 7, 1998, on international cooperation for development, provided they have the legal form of a foundation or public benefit association (asociación de utilidad pública). And they can also be made to entities resident in other member states of the European Union or European Economic Area, with which mutual assistance legislation allows the exchange of tax information as determined in the General Taxation Law, on condition that they do not have a permanent establishment in Spain and are equivalent to the foundations, associations or organizations mentioned above.
These entities will have to fulfill certain requirements to be able to be considered not-for-profit entities and be eligible for the tax credits (relating, among other characteristics, to their purposes, to how their income is used or to the obligation not to carry out activities falling outside the purposes stated in their bylaws). Notable requirements are the need to be registered on the relevant register and the fulfillment of various obligations related to accounting and submitting accounts, together with the obligation to prepare a specific economic report every year.
To apply the tax credit, a certificate issued by the beneficiary entity is needed with the minimum contents defined in Royal Decree 1270/2003 of October 10, 2023, approving the regulations for applying these patronage tax rules. Among other contents, the certificate has to state that the recipient is one of the beneficiaries under Law 49/2002.
And, in line with this, the beneficiary entities will have to report to the tax authorities every year the certificates they have issued for received gifts and donations which are deductible or are eligible for a tax credit, with identification of the donors, among other elements.
- These requirements should not prevent donations being made to entities that are not resident in Spain and therefore might not meet any of the described requirements (including for them to be registered in Spain or to issue certificates with the specified minimum contents). In fact, the CJEU recognized in a judgment on January 27, 2009 (case C-318/07) that “Article 56 EC precludes legislation of a Member State by virtue of which, as regards gifts made to bodies recognised as having charitable status, the benefit of a deduction for tax purposes is allowed only in respect of gifts made to bodies established in that Member State, without any possibility for the taxpayer to show that a gift made to a body established in another Member State satisfies the requirements imposed by that legislation for the grant of such a benefit.” And it made a similar finding in a judgment on June 16, 2011 (case C-10/10).
It is nevertheless important to act prudently in these cases by obtaining the appropriate certificates for donations and gather the necessary proof to show that the beneficiary entities are similar to those in Spain and therefore are eligible for the tax credit; basically, because in these cases the beneficiary entities will not be required to send information periodically to the Spanish tax authorities on the donations.
- In general, any donations (both in cash and in kind) made to one of the public benefit organizations, who perform socially viable services e.g. assistance to victims of armed conflicts and wars in Poland and abroad, are deductible from income / profit for tax purposes.
In order to take advantage of the deduction from tax on donations made, the beneficiary of the donation should be a public benefit organization (included in the publically available list of qualified organizations –PBOs-) or equivalent organizations operating in Poland or in EU countries. However, this deduction is currently not available on donations made directly to Ukrainian based organizations.
The amount of the deduction cannot exceed 10% of the taxable income in CIT and (depending on its nature -cash or in-kind-) should be properly documented (i.e. bank transfer / relevant confirmations).
- On March 12 2022, the Act on aid to citizens of Ukraine in connection with armed conflict on the territory of this country came into force. The special purpose act allows for favorable tax treatment of humanitarian aid expenditures incurred by corporations, which are added to tax preferences mentioned above, although the possibility of benefiting from both tax preferences for the same expenditures simultaneously remains an open question.
In particular, expenses related to acquisition of property or rights donated (in-kind donations) to specific organizations / institutions for purposes related to countering the effects of hostilities on the territory of Ukraine are fully deductible for the donor. This provision is an exception to the general rules of taxation, according to which the vast majority of donations do not include the right of deduction for tax purposes (other than de deductions mentioned in section 1 above).
This rule applies to in-kind donations made between 24 February and 31 December 2022 to qualified recipients, i.e. primarily non-profit organizations such as foundations, associations (in particular those with the status of public benefit organization or equivalent) operating in Poland or equivalent organizations operating under Ukrainian law, local governments, or entities performing medical activities in Poland or Ukraine.
In addition to the cost of in-kind donations, the cost of services rendered free-of-charge to the benefit of the above-mentioned qualified entities is also deductible, provided that the purpose of the service is to counter the effects of hostilities on the territory of Ukraine.
The costs of the above-mentioned donations and free-of-charge services will not decrease the profitability of the particular taxpayer for the purposes of the so-called minimum CIT regulation, as they will not (based on the exact provisions of the special purpose act) be included in the relevant calculation. Consequently, in-kind donations or provision of free-of-charge services will not deteriorate the relevant taxpayer's position for the minimum CIT tax purposes.
The aforementioned catalogue of PBOs partially overlaps with the one included in the special purpose act.