Investment reserve: the TEAC concludes that keeping the asset is not enough if the reserve disappears from the balance sheet

The investment reserve must remain on the balance sheet throughout the entire maintenance period of the investment. This is what the Central Economic-Administrative Tribunal (TEAC) has established in its Resolution 9105/2024 of 19 February 2026, issued to unify doctrine, concluding that the disappearance of the reserve from the business’s equity amounts to an early disposal and gives rise to repayment of the tax benefit obtained, even where the assets in which the investment was made remain in use and in operation.

The ruling concerns the Canary Islands Investment Reserve (Reserva para Inversiones en Canarias, RIC), but it bears directly on the Balearic Islands, whose special regime reproduces the structure of the Canary Islands regime almost word for word.

It is also worth going beyond the criterion itself: the ruling leaves open several areas of dispute that should be identified before they arise in a tax audit.

In summary

• Keeping the asset and keeping the reserve are separate, concurrent obligations. Complying with the first does not cure a breach of the second.
• A defect in the separation or title of the reserve in the accounts is penalised, but it does not cause the incentive to be lost. The disappearance of the reserve from the equity requires the incentive to be repaid in full.
• The equivalence between the absence of the reserve and an early disposal admits proof to the contrary, and that is where the real scope for defence lies.

The facts of the case

The dispute arises from a general-scope tax audit carried out by the Regional Inspection Unit (Dependencia Regional de Inspección) of the Spanish Tax Agency (AEAT) in Santa Cruz de Tenerife, concerning the 2017 Personal Income Tax (IRPF) of a sole trader. Among other elements of the tax liability, the tax authorities adjusted the allocations to the Canary Islands Investment Reserve made in the years 2011 to 2014.

When the taxpayer was required to prove how the reserves were recorded in the accounts, the only document provided was the accounts for 2017, in which no reserve appeared in the equity of the business’s balance sheet. The equity was made up solely of the profit for the year, transferred each year to the owner’s personal estate through a current account with the businessman. The inspectors concluded that the profits that had originally funded the reserve were not being retained in the assets allocated to the business, and demanded repayment of the tax benefits together with the corresponding late-payment interest.

The Regional Economic-Administrative Tribunal (TEAR) of the Canary Islands, in a ruling of 28 June 2024, partially upheld the claims. Exercising the powers under article 237.2 of the General Tax Act (Ley General Tributaria, LGT), and although the taxpayer had not raised the point, it reasoned that the investments were still recorded in the asset accounts of the balance sheet, so that the failure to record the reserve was a serious tax infringement subject to a penalty, but not grounds for losing the incentive. Against that ruling, the Director of the Financial and Tax Inspection Department of the AEAT lodged an extraordinary appeal for the unification of doctrine.

The three phases of the incentive and the turning point of 2007

Article 27 of Law 19/1994 of 6 July, amending the Canary Islands Economic and Tax Regime, structures the RIC in three successive phases: allocation, materialisation and maintenance. Its paragraph 3 requires, since the creation of the incentive and without subsequent change, that the reserve appear in the balance sheets with absolute separation and under an appropriate title, and that it be unavailable for as long as the assets in which it was materialised must remain in the business.

Until the reform introduced by Royal Decree-Law 12/2006 of 29 December, with effect for tax periods beginning on or after 1 January 2007, any breach of the provision led to a single consequence: the inclusion in the tax base of the amounts that had originally reduced the taxable base or the tax liability. This was confirmed, among others, by the Supreme Court judgments of 7 July 2011 (appeal 235/2007), 6 February 2012 (appeal 4557/2008) and 26 April 2012 (appeal 89/2010), the last of these in a case where the allocation had been recorded under the heading of voluntary reserve.

The 2006 reform changed that scheme by introducing a specific penalty regime in paragraph 17 and reporting obligations in the notes to the accounts in paragraph 13, and by expressly excluding breaches of paragraphs 3, 10 and 13 from the inclusion effect provided for in paragraph 16. From that exclusion arises the interpretative doubt that the Central Tribunal now resolves.

The Tribunal’s criterion: formal breach versus substantive breach

The TEAC interprets paragraphs 3, 16 and 17 of article 27 together and draws a clear distinction between two levels.

The first is that of the formal defect in the accounting entry. The serious infringement under article 27.17.a), the Tribunal points out, is intended for cases where the reserve exists and the funds are in fact tied up, but its accounting record is defective, either because it does not appear with absolute separation from other reserves or because it lacks an appropriate title. This last concept deserves attention, because the Tribunal does not confine it to the name of the entry: it also includes its proper allocation out of the profit for the year. A reserve set up out of the capital account, or placed in the retained earnings account, does not meet the legal requirement, a criterion already present in earlier case law.

The second level is that of the substantive breach. Where the reserve was never allocated, or where, having been allocated, it disappears from the balance sheet before the end of the maintenance period, there is no formal defect but rather the absence of the very commitment to tie up the funds that justifies the incentive. The Tribunal reasons that the opposite view would lead to an incoherent result, since it would place a taxpayer who never allocated the reserve in a better position than one who allocated it and later disposed of it. The consequence is the inclusion of the benefit obtained in accordance with paragraph 16, together with the corresponding late-payment interest.

On this basis, the TEAC rejects the reasoning of the Regional Tribunal: maintaining the assets and maintaining the reserve are separate and concurrent requirements. The fact that the assets remain in operation does not secure the incentive if the profits that financed it have left the business’s assets.

The legal construction is an equivalence, not a closed presumption

It is worth dwelling on how the Tribunal reaches its conclusion, because the real prospects of defence depend on it.

The TEAC does not arrive at inclusion by way of a breach of paragraph 3, which paragraph 16 expressly excludes from that consequence. It arrives at it by equating the absence of the reserve from the balance sheet with the first of the situations that paragraph 16 itself does provide for: disposal of the reserve before the end of the maintenance period. The interpretative operation is therefore teleological rather than literal, and rests on the purpose of business self-financing that the legislator pursues with the incentive.

That equivalence does not, however, operate automatically. The Tribunal expressly accepts that the absence of a formally separate and correctly titled reserve does not of itself lead to inclusion if the taxpayer shows that there are other items in its accounting equity that perform the tying-up function that the rule assigns to the reserve. What matters is no longer the label on the account but a verifiable economic fact: that the undistributed profits remain retained in the assets allocated to the business.

Hence the ground on which an audit is fought shifts towards evidence. The burden lies on the person applying the incentive, in accordance with article 105.1 of the General Tax Act (LGT), and extends to the materialisation and maintenance phases. In the case decided, the inspectors found no item on the balance sheet that performed that function, because the result was transferred in full each year to the owner’s personal estate, and that circumstance proved decisive.

The paradox of the penalty regime

The ruling produces an effect that deserves to be pointed out. In the case at issue, the TEAC concludes that the penalty under article 27.17.a) does not apply, because the objective element of the offence covers neither the cases where the tying-up of the profits was never recorded, nor those where, having been recorded, the reserve was disposed of before the incentive was consolidated.

The result is that the specific infringement, with its proportional fine of 2% of the allocation, is reserved for the less serious conduct, while the more serious conduct falls outside it. This does not mean that the conduct goes unpunished: the repayment of the benefit generates an unpaid tax liability that can be redirected, if the required elements are present, to the general regime of article 191 of the General Tax Act (LGT), which was precisely the one applied in the original file. The practical difference is not minor, because that general regime is not limited to 2% and requires a separate assessment of culpability, which is in itself an area of dispute.

Proportionality, a question the ruling leaves open

The criterion builds a markedly binary system of consequences. Either the breach is formal, and is then penalised by a reduced percentage without affecting the incentive, or it is substantive, and the entire benefit is lost together with late-payment interest. There is no intermediate response.

It is fair to ask whether that binary outcome is always proportionate, particularly where the economic purpose of the incentive continues to be met: the investment was made in the territory, the asset remains allocated to the business and in operation, and the profits have not been distributed to third parties. Article 3.2 of the General Tax Act (LGT) subjects the application of the tax system to the principle of proportionality, and it is not obvious that full repayment is the only response compatible with it when the economic substance of the benefit remains intact.

The question is not merely academic. The investment reserve is State aid subject to the limits of European Union law, and the coherence between the purpose of the incentive and the consequence of breaching it forms part of the analysis. It must be stressed, in any event, that the criterion established by the TEAC is binding in administrative proceedings, so that this debate can only be taken, if at all, to the contentious-administrative courts. Pointing this out is not the same as predicting the outcome.

The shifting of the regularisation in time

A less commented aspect, but one of great practical reach, is the point in time at which the effect arises. Paragraph 16 places the inclusion in the year in which the circumstances giving rise to the breach occur, not in the year in which the benefit was applied. Since the obligation to maintain the reserve lasts throughout the whole period for which the investment must be kept, an audit of a single open year may carry with it the repayment of allocations made years earlier.

This is exactly what happened in the case decided, where the regularisation of the 2017 IRPF reached allocations from the years 2011 to 2014. The incentive therefore generates a latent contingency that lasts for the whole life of the maintenance obligation and is not exhausted by the expiry of the limitation period for the allocation years.

The specific problem of the sole trader

The investment reserve is a category of corporate origin transplanted into IRPF. In a company, the allocation of an unavailable reserve has a real legal effect on the distribution of profit. In a sole trader under the direct estimation method (estimación directa) there is no separation of assets between the business and its owner, so the reserve exists only in the accounts and its disappearance may occur through sheer inertia, without any conscious decision to dispose of it, through the ordinary transfer of the result to the current account with the businessman.

The rule offers no mitigation for this circumstance. Paragraph 15 of article 27 of Law 19/1994 extends the same requirements to individuals as to companies, and in the Balearic regime the obligation is formulated in an even more explicit way. The result is that the most severe consequence frequently falls on the taxpayer with the lightest administrative structure, who is also the one most likely to be unaware that the accounting obligation outlasts the investment itself by years.

Implications for the Investment Reserve in the Balearic Islands

The Investment Reserve in the Balearic Islands, created by the seventieth additional provision of Law 31/2022 of 23 December for tax periods beginning between 1 January 2023 and 31 December 2028, and implemented by Royal Decree 710/2024 of 23 July, reproduces the architecture of the regime on which the TEAC has ruled.

Number 3 of section Four of that additional provision uses wording identical to that of article 27.3 of Law 19/1994. Number 8 sets the period for which the assets must be kept at five years, increased to ten in the case of land. Number 12 regulates the information that must be included in the notes to the annual accounts, together with a register of investment assets for those not required to prepare them. Number 14 requires the benefit to be included in the tax base where the reserve is disposed of before the end of the maintenance period or where the requirements of the section are breached, with the exception of those contained in its numbers 3 and 12. And number 15.a) classifies as a serious tax infringement the failure to record the reserve in the accounts in the terms of number 3, penalised by a proportional fine of 2% of the allocation that should have been made.

The parallel is practically verbatim, with one structural difference worth mentioning: the Balearic regime does not include the obligation to submit an investment plan that the Canary Islands regime does provide for, which is why the exception in number 14 is limited to numbers 3 and 12, as opposed to paragraphs 3, 10 and 13 of article 27. The correspondence between the provisions that determine the TEAC’s criterion is, however, exact.

There is also a feature that reinforces the requirement in the Balearic regime. Number 13 expressly requires individuals who apply the deduction from the tax liability to keep accounts in the form required by the Commercial Code from the year in which the profits intended to fund the reserve are obtained until the year in which the assets in which the reserve was materialised must remain in operation. What under the Canary Islands regime had to be constructed by interpretation, from paragraph 15 and the administrative and judicial doctrine, appears here in the text of the law itself, and with a time frame that coincides exactly with the one the TEAC has considered decisive.

A consequence follows that should be anticipated. Although the special regime is provided for tax periods beginning up to 31 December 2028, the obligations it generates extend well beyond that. An allocation made out of the profits of the last years of the regime may be materialised up to three years later and require the investment to be kept for a further five years, or ten in the case of land. The obligation to keep the reserve on the balance sheet accompanies that timetable in its entirety, so that it will last well into the next decade.

It must be made clear, however, that the TEAC’s criterion was established on Law 19/1994 and that there is not yet any equivalent ruling on the Balearic reserve, so its transposition cannot be taken for granted. That said, the identity of wording, structure and purpose makes it reasonable to anticipate that the tax authorities will apply the same reading, especially as audits begin of the allocations made out of the profits of 2023 onwards.

Practical implications

The ruling shifts the focus of the audit. Showing that the investment was made and that the asset remains allocated to the business is no longer enough: it is necessary to be able to demonstrate, year by year and throughout the entire maintenance period, that the profits that gave rise to the incentive remain tied up in the business’s assets.

The risk is concentrated in three scenarios:

• Sole traders and entities under the income attribution regime (régimen de atribución de rentas), where the ordinary transfer of results to the owner’s personal sphere can empty the reserve without any conscious decision to dispose of it.
• Corporate and restructuring transactions carried out during the maintenance period, in which the reserve may fail to be reflected in the balance sheet of the recipient entity, as well as distributions of profit or returns of equity agreed without first checking whether there are committed reserves.
• Changes of adviser, accounting software or finance manager, which frequently break the traceability of items whose life extends over five or ten financial years and whose justification may be requested long afterwards.

The asymmetry of the consequences justifies the attention. A defect in separation or title is settled with a penalty of 2% of the allocation. The disappearance of the reserve from the balance sheet requires repayment of the entire benefit obtained, with late-payment interest, and opens the door to the general penalty regime.

Conclusion

As regards the investment reserve, the investment and the reserve are two separate obligations that must be met simultaneously and continuously over time. The TEAC has closed off the interpretative route that allowed the disappearance of the reserve to be treated as a mere accounting irregularity, and has done so through a criterion that is binding on the whole tax administration, in accordance with article 242.4 of the General Tax Act (LGT), while the particular legal situation arising from the appealed ruling is respected by virtue of article 242.3.

Relevant questions remain open, notably the proportionality of the consequence where the economic purpose of the incentive continues to be met, and the room for evidence that the Tribunal itself recognises for those who can show effective tying-up of the profits by other accounting means. For companies and professionals in the Balearic Islands that have begun to allocate the reserve provided for in the seventieth additional provision of Law 31/2022, the warning comes in advance: the strength of the incentive is at stake both in the investment decision and in how it is reflected in the accounts throughout the entire maintenance period.

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