Deduction for donations to non-profit entities in corporate income tax and VAT

Law 49/2002, of December 23, 2002, on the tax regime for non-profit entities and tax incentives for patronage, provides for a series of deductions in the IS quota to be applied to those companies that make donations for social purposes, provided that certain requirements are met, which we will study below.

To which entities can the donation be made?

Article 16 of Law 49/2002 establishes that the tax benefits contained therein will be applicable provided that the donations or contributions are made in favor of the following entities:

• Non-profit entities.
• State, autonomous communities and local entities, as well as autonomous bodies thereof.
• Public universities and colleges attached to them.
• Instituto Cervantes, Institut Ramon Llull and other institutions with similar purposes within the autonomous communities with their own official language.
• Public research bodies dependent on the General State Administration.

What assets can constitute the donation?

In addition to the beneficiaries of the donations, the Law also establishes those goods object of donation that give right to apply the deduction. The Law accepts that the donations can be constituted by monetary contributions as well as by goods or rights. 

However, all these donations must be irrevocable, pure and simple in order to be able to apply the deduction, being an indispensable requirement that the donor does not receive any type of consideration for the donation. In the same way, in order to prove the reality of the donation, a certification is required from the donee entity certifying that it has received a donation.

What is the amount and form of the deduction?

The Law accepts that all corporate income taxpayers can apply this tax benefit as long as the above conditions are met.

With respect to the amount of the deduction, it is foreseen that it will be 35% of the amount of the corporate income tax and non-resident income tax for taxpayers with a permanent establishment in Spain. However, this percentage can be increased up to 40% if in the two previous years donations with the right to deduction have been made to the same entity (for an amount equal to or greater than that of the previous tax period). The basis for the deduction of donations cannot exceed 10% of the taxable income of the tax period in question; if the amount donated exceeds this limit, the excess can be deducted in the following 10 periods.

Depending on the nature of the donated good, the basis for the deduction will be calculated as follows:

• Monetary donations: the amount thereof.
• Donations of goods or rights: the book value they had at the time of the donation. Failing this, the value calculated in accordance with the Wealth Tax rules.

It is worth mentioning that these amounts will have as a maximum limit the normal market value of the property or right transferred at the time of its transfer.

If I do not meet the above conditions, is there any way to deduct the donation expense?

The only mechanism foreseen in our legal system to deduct donations made in the IS is the deduction mentioned above. In the case of a donation made without complying with the aforementioned requirements, article 15 e) of the LIS expressly establishes the prohibition to deduct the expense (see the case of donations made to individuals or to those entities not included in Law 49/2002). It is of vital importance to take this circumstance into account when making a donation since, in the case of being eligible for the deduction, the tax relief is quite significant.

How are donations of goods taxed for VAT purposes?

Law 37/1992, of December 28, 1992, on Value Added Tax contains certain notes on the VAT taxation of donations made by businessmen and professionals to entities covered by Law 49/2002, of December 23, 2002. The main rules are as follows:

• The possibility of applying the reduced rate of 0% on deliveries as a donation of new goods to non-profit entities is included.
• In the case of donations of clothing or machinery previously used, as well as perishable products such as foodstuffs, it is understood that we are dealing with a case of self-consumption where it is presumed that there has been a total deterioration of the goods, so that the taxable amount of the donation in kind is zero, provided that it has been made in favor of a non-profit foundation.

In conclusion, the deduction for donations is configured as a tax benefit with quite flexible requirements and with quite generous deduction percentages in the case of the IS, which seeks to reward those companies that, in a disinterested way, make donations to entities with social purposes. 

That is why, in situations such as the current ones, where many companies make donations to those affected by the flooding of October 29th in Valencia, it is important to know the requirements of the Law in order not to be taxed for donations made in a disinterested way. It is especially relevant in the case of VAT and taxation of used goods that have been donated or in the case of monetary donations to different NGOs.