In a previous issue of the magazine, we analyzed some of the main features of the major tax reform that the Spanish Ministry of Finance published in January. As anticipated, some relevant modifications have been finally introduced before its submission to the Spanish parliament.
Corporate Income Tax (CIT)
The abolition of the tax credit for exporting-related activities will be carried out, as foreseen, in a progressive manner. However, instead of reducing the tax credit through the application of a coefficient to be levied on the amount of the credit generated (as ruled in a draft version of the Bill), it is now foreseen that the tax credit rate will be reduced from 25% at present to 12%, 9%, 6% and 3% in 2007, 2008, 2009 and 2010, respectively.
As a consequence of the many protests against the progressive derogation of the tax credit for investments in R&D projects, the draft law finally maintains the credit until the tax year commencing January 1 2012. However, it will be progressively lowered. For 2007, a coefficient of 0.97 will be levied on the tax credit generated (which means that only 97% of the credit may be applied for CIT purposes); in 2008, 2009, 2010 and 2011, the coefficients will be 0.94, 0.91, 0.88 and 0.85, respectively.
Dividends distributed by Spanish holding companies eligible for the so-called Entidad de Tenencia de Valores Extranjeros (ETVE) regime, in favour of Spanish tax resident individuals, will not be considered as "savings income" from the personal income tax perspective, and thus taxable at an 18% flat rate. Conversely, they will be considered as "regular income" taxable according to the tax brackets but with the right to apply an international double taxation tax credit corresponding to taxes borne by the ETVE on the exempt income obtained.
Non-residents Income Tax (NRIT)
An annual exemption limited to €1,000 ($1,241) will be granted in respect of Spanish-sourced dividends obtained by non-resident individuals, provided that said individuals are resident within the EU or in a country that entered into a tax treaty with Spain that provides for an exchange of information clause. However, it is stated that the NRIT withholding tax (18%) will be levied on the exempt amount, who shall be reimbursed to the taxpayer via a refund request.
The expected timetable for the tax reform continues without significant changes, with the aim of entering into force by January 1 2007.
Jordi Domínguez (jordi.domínguez@garrigues.com), New York and Iván Rabanillo (ivan.rabanillo.kuroki@garrigues.com), Barcelona
