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Royal Decree-law 12/2012, of March 30, 2012 subsequently amended by Royal Decree-law 20/2012, of July 13, 2012, introduced to corporate income tax legislation a general limit on the ability to deduct finance costs (i.e. borrowing costs) which replaced the former thin capitalization rule .

Put briefly, effective for periods that begin on or after 1 January 1, 2012, the taxpayers affected by that limit can only deduct their net finance costs for the period up to a limit of 30% of their operating income (with a minimum deduction of 1 million euros), although (i) any excess amounts that have not been deducted can be used in the 18 subsequent periods and, also, (ii) if the net costs are under that limit, the difference can be added to the limit in the following five periods.

Following the many doubts arising in connection with the legislation, the Directorate-General of Taxes has issued a Ruling, dated July 16, 2012, published in the Official State Gazette (the “BOE” after its initials in Spanish) of July 17, 2012, setting out the interpretation rules to be applied, which we summarize below. The Ruling contains an array of very useful numerical examples, to which we refer to for a better understanding of the matter and which will have to be used if further doubts arise, since we are faced with general rules that will have to be applied to scenarios with a broad range of features.

1. DEFINITION OF FINANCE COST AND INCOME
2. DEFINITION OF OPERATING INCOME
3. FUTURE USE OF NET FINANCE COSTS THAT HAVE NOT BEEN DEDUCTED OR OF UNUSED OPERATING INCOME
4. SPECIFIC RULES FOR TAX GROUPS