1.Regulatory Framework

The special regime for small-sized entities (“ERD”), set out in Articles 101 to 106 of Law 27/2014, of November 27, on Corporate Income Tax (“LIS”), is one of the main tax-support tools available to small and medium-sized Spanish businesses. It’s designed to encourage capitalization, productive investment, and job retention among companies whose economic size — measured by net turnover — stays below certain thresholds.

Beyond the incentives themselves, the regime also ties into the special tax rate under Article 29 LIS, the capitalization reserve under Article 25 LIS, and the installment payment rules under Article 40 LIS. In short, this isn’t a menu of standalone perks — it needs to be reviewed as a whole at every fiscal year-end.

2.What Tax Benefits Can an SME Under the ERD Regime Claim?

Article 101 LIS sets the scope of the regime: it applies whenever net turnover for the immediately preceding tax period comes in under €10 million. Once that’s met — and provided the company doesn’t qualify as a “patrimonial” (asset-holding) entity — it can access:

  • Free depreciation tied to job creation (Art. 102 LIS): unrestricted depreciation of new tangible fixed assets and real estate investments used in the business, conditional on growing and maintaining average headcount over 24 and 48 months respectively, capped at €120,000 per additional employee.
  • Accelerated depreciation (Art. 103 LIS): depreciating new tangible fixed assets, real estate investments, and intangibles used in the business at up to double the maximum straight-line rate.
  • Blanket bad-debt allowance (Art. 104 LIS): a deduction of up to 1% of the year-end debtor balance, with no need to prove insolvency debtor by debtor.
  • Leveling reserve (Art. 105 LIS): reducing positive taxable income by up to 10%, capped at €1 million a year, via a restricted reserve.
  • Capitalization reserve (Art. 25 LIS): a taxable-income reduction tied to equity growth, from 20% to 30% depending on headcount growth, rising to 25% for companies with turnover under €1 million.
  • Finance leases (Art. 106 LIS): a higher deductible ceiling for recovering the leased asset’s cost (three times the maximum straight-line rate, versus double under the general regime).
  • Reduced tax rate (Art. 29 LIS): currently being phased down from the general 25% to 20%, as detailed below.

The ERD tax rate itself is mid-phase-down: 24% in 2025, 23% in 2026, 22% in 2027, and 20% from 2028 onward. Don’t confuse this with the regime for “micro-businesses” (turnover under €1 million), which are taxed on a different scale (19%/21% in 2026), or with the 15% rate for newly created companies.

3.The Grace Period: Staying an ERD Even After Crossing €10 Million

One of the most important — and often overlooked — features of the regime is the “extension” or grace period built into Article 101 LIS itself. Crossing the €10 million turnover threshold doesn’t mean automatically losing ERD status.

Specifically, a company keeps its ERD status for the three tax periods right after the one in which it crosses the threshold, provided:

  • It met the ERD conditions in the very period it crossed the threshold, and
  • It also met those conditions in the two tax periods right before that one.

In practice, a growing company that pushes past €10 million doesn’t lose its ERD tax perks overnight — it gets an extra three-year window to keep using them, which matters a lot when planning investments, leveling and capitalization reserves, and the applicable tax rate.

This extension also applies when the threshold is crossed because of a restructuring under the special regime of Chapter VII, Title VII LIS, provided the entities involved met the ERD requirements both in the year of the transaction and the two preceding tax periods.

We recommend that any company nearing the €10 million mark document, year by year, its compliance with these conditions, so it can prove its right to keep the regime during the extension period if challenged in an audit.

4.The Risk Posed by Corporate Groups and Structures with Common Shareholders

The €10 million threshold is never assessed looking at just one company in isolation. The rules require combining turnover in at least two scenarios that create real risk of misapplying the regime:

Commercial groups (Art. 42 of the Commercial Code): when several entities form a group in the commercial-law sense — typically through control, dominance, or shared decision-making — turnover is calculated on a combined basis across the whole group. This applies even if the group isn’t required to file consolidated accounts, which is one of the most common sources of error in practice.

Family structures and common shareholders (Art. 101.2 LIS): turnover is also combined when the same individual — alone or together with relatives up to the second degree (spouse, parents/grandparents, children/grandchildren, or siblings) — holds majority control in several companies carrying out the same, a complementary, or a same-sector activity.

The practical risk is obvious: an individual or family group might hold majority stakes in several operating companies — directly or through holding companies — each with turnover well under €10 million yet still lose ERD status across the board once the turnover of all related entities (linked by family ties or control) is combined and crosses the threshold.

This group or family-linkage analysis must happen before applying any ERD incentive — looking not just at ownership percentages, but also family relationships among shareholders and whether there’s shared decision-making across holding or operating companies.

Scenarios vary widely: two holding companies controlled by siblings, cousins, or spouses can count as a group here when combined stakes held by relatives up to the second degree add up to majority control across both corporate chains — even without a formal common parent company.

Conversely, no meaningful family relationship among each holding’s controlling shareholders, or uncoordinated minority stakes, can rule out aggregation — even in similar-looking structures. The difference usually comes down to specifics of the shareholder structure — who holds majority control, and what family relationship exists among shareholders — so every family structure needs individual review.

5.Conclusions and Recommendations

Despite the gradual narrowing of its preferential tax rate, the ERD regime remains one of the most significant tax incentives for Spanish SMEs — both through its depreciation and reserve incentives, and through the option to keep the regime for three extra years after crossing the turnover threshold.

We recommend that companies and family groups under this regime:

  • Check at every fiscal year-end whether the company — alone or combined with related companies and individuals — crosses the €10 million turnover threshold.
  • Formally document the analysis of the commercial group perimeter and any relevant family structures, regardless of any obligation to consolidate accounts.
  • Make the most of the three-year grace period once the threshold is crossed, verifying compliance in the two preceding tax periods.
  • Plan for using the leveling reserve versus the capitalization reserve, since they can’t be used together and both tie into the applicable tax rate.
  • Confirm, before applying for any incentive, that the company doesn’t qualify as a “patrimonial” entity under Article 5.2 LIS.

As tax authorities pay closer attention to group structures and to correctly defining the tax perimeter in family-business settings, periodically reviewing these issues is no longer a mere formality — it’s a core part of managing tax risk. At addwill, our team of tax specialists would be glad to advise you on these matters.

Author:

Albert Folguera
Partner, Tax Department, addwill