The Directorate-General for Taxation (DGT) resolves questions on how to calculate the deduction in Article 36.2 of the Corporate Income Tax Act.
The corporate income tax laws include a significant tax incentive for the culture sector through tax deductions on investments in film productions, audiovisual series and live music and performing arts events. A little under a year ago, Act 38/2022, of December 27, on the establishment of temporary energy charges and credit institutions (...) introduced several amendments to the deductions for national productions (Article 36.1 of Act 27/2014, on Corporate Income Tax [“the CIT Act”]) and for executing foreign productions (Article 36.2 of the CIT Act), with effect for financial years beginning on or after January 1, 2023. These amendments were analyzed in our Legal Flash | Tax developments for companies.
The amendments of Article 36.2 of the CIT Act, which can be applied by producers in charge of a foreign feature film or audiovisual works, are as follows:
- The maximum limit of the deduction has been increased to €20 million (from the €10 million established in the previous regulation) and to €10 million for audiovisual series, in which case the deduction will be determined per episode.
- The €100,000 limit per person for creative personnel expenses was eliminated. These expenses can now be included in the deductible base.
Despite the positive new regulations, there was uncertainty in the sector on their application to productions that had started before January 1, 2023, and on determining the percentage and deductible base, as well as some limits that may apply in the case of audiovisual series.
These questions were raised with the DGT, which has issued its binding response (V2533-23) obtained under the legal guidance of Cuatrecasas—and which at the time of uploading this post has not yet been made public—as follows:
- In relation to implementing the amendments introduced by the CIT Act 38/2022, the DGT rules that they are applicable to productions whose executive production ends in the tax period starting January 1, 2023, regardless of whether the production in question was partly produced in previous tax periods. This conclusion is consistent with the fact that the deduction cannot be verified and applied until the tax period in which the production of the foreign film ends. However, the DGT’s response includes a specification for those cases of partial deliveries of the work and taking into account the contractual clauses that have been agreed.
- In relation to determining the deductible base for audiovisual series, the DGT concludes that, taking into consideration the wording of the approved regulations, it must be determined per episode. In the event there are costs common to several episodes, reasonable allocation criteria must be followed, without assessing the allocation criteria proposed by the consultant, as it is a matter of fact. The allocation criteria, as indicated in the response, can be assessed by the inspection and verification bodies of the tax authorities, therefore it is advisable to make it reasonable and consistent.
- In relation to determining the percentage to deduce for audiovisual series, the DGT confirms that it should be determined per episode. That means that for the first million euros of the production cost of each episode executed in Spain, the increased deduction rate of 30% is to be applied.
- In relation to the limits provided for in Article 45 of the CIT Act, which must be respected for the deduction to be applied, the DGT rules that the production cost of all the episodes in the television series, or the cost of the entire season of the series when applicable, can be used as a reference.
Ultimately, the DGT’s binding response has cleared up—very favorably—the uncertainty in the sector caused by the amendments to the tax deduction regulations on executing foreign audiovisual productions under Act 38/2022. This response ensures greater legal certainty for film producers who meet the requirements to apply this strong tax incentive.
This is in addition to the European Commission’s recent validation of the Spanish tax deduction regime for film productions under European regulations, which we discussed in our Post | Legal certainty for investment in the film industry.