On January 20, the Spanish government published the draft of the second piece of the planned tax reform for 2006 (to be in force from January 1 2007). The first piece, which deals with anti-abuse measures, was also made public recently and was analyzed in a previous issue of the magazine.

This new piece, which will be discussed in the Spanish parliament over the next months (in parallel with the anti-abuse one), affects not only personal income tax but also corporate income tax and non-resident income tax.

As regards personal income tax, a major reform is being introduced that will affect the tax treatment of all kinds of savings, and the marginal income tax rate will be reduced from 45% to 43%.

In corporate income tax, the government plans a gradual reduction of the current corporate tax rate (from 35% in 2006 to 30% in 2011). In parallel, most of the existing tax credits will be eliminated in this framework period. Thus, tax credits as important as the R&D, export activities, and reinvestment tax credits will be abolished from 2007 onwards, 20% each year until 2011, in which there will be almost no tax credits (apart from double taxation credits and a few others) in the Spanish Corporate Tax Law.

Regarding non-resident income tax, it is worth mentioning the relevant changes introduced in the tax rates applicable both to income obtained through permanent establishments (rate down from 35% to 30%, although the branch profit tax is up from 15% to 18%) and to income obtained without a permanent establishment (the main changes affecting capital gains – down from 35% to 18% – and dividends and interest-up from 15% to 18%).

However, given that changes to this text are likely, the above is subject to change.

The expected timetable for the reform in 2006 is that first it must be approved by the Spanish Council of Ministers (around March) and next it must be debated in the Spanish parliament throughout the rest of the year, with the aim of entering into force by January, 1 2007.

Jose Palacios (jose.palacios@garrigues.com), Madrid