Treatment of the Entity Debts' Write-Offs in the Personal Income Tax (IRPF) of the Partners

A limited liability company owes certain amounts to its partners, individuals who, in the face of the continuing losses of the entity, decide to forgive it, as a contribution to the company's equity.

When in doubt about their taxation, they ask the General Directorate of Taxation (DGT) regarding the tax treatment of this operation in the Personal Income Tax.

On the first hand, the Administration ignores the question of compliance with the mercantile norms that regulate the requirements for the contributions of partners, in what refers to the contribution made by the partners to strengthen the equity situation of the entity.

It reminds that for accounting purposes the grants, donations and bequests delivered by the partners or owners of the company do not have the qualification of income, but of own funds, by placing them on the basis of equivalence from an economic perspective with the other contributions that the partners or owners can deliver to the company, mainly for the purpose of strengthening their assets (DGT CV 16-3-09 V0488-09). The equation made by the accounting standard of the contributions made by the partners to the company without consideration, whether or not they are intended to compensate for losses, must also be carried out in terms of the personal income tax qualification of such contributions. Being so, the contribution consisting of the credit they held against the company, provided that the portion of the credit forgiven by each partner corresponds to its percentage of participation in the company, integrates the acquisition value of the shares of the entity.

In any case, to consider that the contribution made forms part of the entity's own funds, this must be done without the right to a refund or without any consideration being paid for said contribution.


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