Royal Decree-Law 4/2014, of 7 March 2014, establishing urgent measures on refinancing and business debt restructuring.

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1 Tax Newsflash Overview of main tax reforms recently introduced in Spain April 2014 Royal Decree-Law 4/2014, of 7 March 2014, establishing urgent measures on refinancing and business debt restructuring. Law 22/2013, of 23 December 2013, approving the state budget for Royal Decree Law 14/2013, of 29 November 2013, establishing urgent measures to adapt Spanish law to European Union legislation on the supervision and solvency of financial entities. This newsflash briefly summarises the main tax reforms which have recently been introduced in Spain with the passing of this legislation. I. CORPORATE INCOME TAX REFORMS 1. Debt capitalisation Royal Decree-Law 4/2014 introduces the following regulations for tax years starting on or after 1 January 2014: - As a general rule, Corporate Income Tax ( CIT ) is not levied on debt capitalisations. With the reform of RDL 4/2014, the Spanish tax administration s criteria regarding these operations have been converted into a regulation with the force of law. - For the capitalisation of a credit granted by the original creditor, the company or entity which increases its capital will not include any income in its taxable income, irrespective of how the operation is treated for accounting purposes. However, if the debt has been acquired by the creditor at a discount, the difference between the nominal value of the credit and its cost should be included in the contributor s taxable income. This reform changes the regulations in force up to the present date, as previously it was the beneficiary company/entity which was taxed on the income obtained as a result of the contribution. 1

2 2. Taxation of income generated from debt remissions and deferrals Taxation of income obtained by a debtor as a result of an approval of a debt remission or deferral is deferred. The income is included in the debtor s taxable income as the financial expenses incurred for the debt are recorded. If the income obtained is higher than the financial expenses, the income will be included in taxable income in proportion to the financial expenses recorded in the year for this concept with respect to the total amount of expenses. The reforms, introduced by Royal Decree-Law 4/2014, will take effect for tax years starting on or after 1 January New allocation timing rule for certain bad debt and pension expenses Royal Decree Law 14/2013 establishes a new allocation timing rule for certain bad debt and pension expenses in accordance with which certain deferred tax assets will not reduce financial entities equity so that these entities can continue operating in a competitive environment like those of other EU member states. Although financial entities are the main beneficiaries of this reform, it applies to all CIT taxpayers. a. General tax regime Bad debt and pension expenses that meet certain requirements and that taxpayers have considered non-deductible under the Spanish CIT Act will be treated as deductible in the relevant tax year pursuant to the CIT Act but with the limit of the positive taxable income of the year before the offsetting of tax-loss carryforwards. Any excess will be allocated to the following year, up to the same limit 1. With this reform, such bad debt and pension expenses do not generate tax-loss carryforwards. To be able to apply this rule, a deferred tax asset should be recorded for these expenses. The expenses regarding which the aforementioned limit applies are: - Credit or other assets impairment expenses related to bad debt with non-related parties, with the exception of those regarding which the rule established in Section 12.2 a) of the CIT Act applies (bad debt provisions originally treated as non-deductible that become deductible as, at the end of the tax year, more than six months have elapsed since the payment obligation became due, will not be affected by the limit). - Expenses recorded to cover provisions for social security schemes and, if the case, early retirement, that were treated as non-deductible because they were long-term benefits for staff or because they were expenses to cover provisions for internal funds for such benefits or other similar contingencies established in the Spanish Pension Plans and Funds Act. This reform will take effect for tax purposes for tax years starting on or after 1 January In these cases, the FIFO rule will apply, i.e. the excess of the oldest tax year will be reversed first. 2

3 b. Special rules for tax consolidation regime Special rules will apply to groups of entities/companies that are taxed under the special tax consolidation regime. These rules are as follows: a) The sum of individual positive taxable incomes of the group entities/companies will not include the reversal of positive adjustments made for the expenses referred to in the previous point or the offsetting of individual tax-loss carryforwards. The reversal will be taken into consideration at the level of the group s taxable income before the offsetting of tax-loss carryforwards 2. b) When an entity/company joins a tax consolidation group, the reversal of the expenses referred to above will be made at the level of the group s taxable income with the limit of the entity/company s individual taxable income before the reversal of the expenses and the offsetting of tax-loss carryforwards 3. For this purpose, dividends on which the tax deduction for the full relief of internal double taxation applies will be excluded. c) In the event that the application of the tax consolidation regime ends or the tax consolidation group is terminated, the entities/companies of the group may reverse the adjustments in proportion to their contribution to these adjustments in the group. These rules will also take effect for tax years starting on or after 1 January Conversion of certain deferred tax assets into credits against the Spanish tax administration or public debt securities Taking effect for tax years commencing on or after 1 January 2014, deferred tax assets for non-related bad debt regarding which the Section 12.2 a) CIT Act rule does not apply or deferred tax assets for expenses incurred to cover provisions for social security schemes and, if the case, early retirement that meet the requirements stated above will become a receivable against the tax administration if any of the following circumstances occur: a) The taxpayer records losses in its audited financial statements which have been approved by its relevant governing body. In this case, the amount of deferred tax assets which may become a receivable will be the result of applying to the total amount of deferred tax assets the percentage of the sum of the taxpayer s capital and reserves represented by the year s accounting losses. b) The taxpayer is being liquidated or is legally declared bankrupt. Deferred tax assets for tax loss carryforwards will also become a receivable against the tax administration when they are generated as a result of having included in the taxable income of tax years commencing on or after 1 January 2014 the reversal of the positive adjustment of the expenses incurred to cover the relevant bad debt or pension provisions. These deferred tax assets will become a receivable against the tax administration when the CIT return for the tax year when these circumstances are met is filed. For these amounts, taxpayers may either claim the payment of the receivable or offset it against other state tax liabilities which they incur after the deferred tax assets become a receivable. 2 Even if the wording of the 21 st additional provision of the Royal Decree Law 14/2013 is not as clear as would have been desirable, we understand that when the Royal Decree Law states that the reversal will operate at the level of the group s taxable income, this means that the group s positive taxable income is used to calculate the limit for the reversal, but that reversal is actually an adjustment to the individual entity/company s taxable income. 3 Again, we understand that the provision actually refers to the limits calculation method. 3

4 Finally, the deferred tax assets may be exchanged for public debt securities once the maximum period for the offsetting of tax-loss carryforwards has elapsed. For this purpose, the maximum period will commence on the date on which the deferred tax assets were recorded. For deferred tax assets that were recorded before 1 December 2013, this period commences on 1 December Micro companies As for previous tax years, for tax years commencing in 2014, companies with a turnover under 5 million which employ less than 25 people and which maintain their staff levels will be taxed at the following reduced rates: Part of taxable base Rate applicable Up to 300,000 20% Remainder 25% When taxpayers are required to pay tax advances (in accordance with Section 45.3 of the Spanish CIT Act (calculated on the basis of taxable income generated during the tax year), the scale indicated above will not apply for the calculation of the tax advance payments. 6. Tax credit for training: use of new technologies The time period for the application of the tax credit is extended to, exclusively, investments made and expenses incurred in 2014 to train staff in the use of new communication and information technologies which can only be used outside the workplace and outside working hours. The tax credit is 1% for investments made and expenses incurred in the tax year minus 65% of any subsidies received by the taxpayer to perform such activities, which are considered to be income of the tax year. If such investments and expenses are higher than the taxpayer s average training investments and expenses of the two previous tax years, the tax credit is 1% for the average amount of training investments and expenses and 2% for the excess amount. 7. Advance tax The General State Budget Act continues to establish two traditional methods for calculating advance tax payments for tax years commencing on or after 1 January These methods are as follows: a) Under the method established in Section 45.2 of the CIT Act, the rate applicable is 18% of the tax payable for the last closed period ending on the first day of the 20 calendar days during which the corresponding advance tax return should be filed. If the last closed period is less than one year, the proportional part of the tax for the previous year will also be taken into account to complete the 12 month period. b) Under the method established in Section 45.3 of the CIT Act, the rate applicable is the result of multiplying by 5/7 the tax rate rounded down (the resulting percentage is generally 21%). This rate is applied to the part of the tax base generated during three, nine and eleven months of the calendar year, calculated in accordance with CIT law. Any discounts, withholdings or advance payments already paid are deducted from the resulting tax payable. 4

5 Taxpayers whose volume of operations exceeded 6,010, in the 12 months prior to the date on which the tax year commences should apply the method stated in paragraph b) above. To apply this second method, the special rules established in the Royal Decree Law 9/2011, of 19 August 2011, and Law 16/2013, of 29 October 2013, should also be met. These rules are as follows: a) For taxpayers with a volume of transactions of 6,010,12.04 or less in the 12 months prior to the first date of the tax year, the tax rate is the result of multiplying by 5/7 the rate rounded down: 21% for taxpayers taxed at the general rate. b) Taxpayers with a volume of transactions of more than 6,010,121.04: a. For turnover 4 of 10 million or under, the rate of the advance payment is the tax rate multiplied by 5/7 rounded down: 21% for taxpayers taxed at the general tax rate. b. For turnover over 10 million and under 20 million, the rate of the advance payment is the tax rate multiplied by 15/20 rounded up: 23% for taxpayers taxed at the general tax rate. c. For turnover over 20 million and under 60 million, the rate of the advance payment is the tax rate multiplied by 16/20 rounded up: 26% for taxpayers taxed at the general tax rate. d. For turnover over 60 million, the rate of the advance payment is the tax rate multiplied by 19/20 rounded up: 29% for taxpayers taxed at the general tax rate. In addition, under Law 16/2013, the following rules introduced by Royal Decree-Law 20/2012 apply to advance payments for tax years starting in 2014 and 2015: - The advance payment tax base should include 25% of any dividends and income accrued in the tax period on which the tax exemption for the avoidance of international double taxation established in Section 21 of the CIT Act applies. This rule only applies to taxpayers that are required to apply the advance payment calculation method that refers to taxable income generated during the tax year. - The application of the minimum advance tax payment for taxpayers whose turnover of the prior year for accounting purposes is not under 20 million is maintained. Generally, the advance tax payments of these taxpayers may not be under 12% of the profits recorded in their income statement of the period corresponding to the advance tax payment and only advance tax previously made may be deducted from this amount. For companies where either the tax exemptions for foreign-source dividends and capital gains and for income generated by a permanent establishment or the deduction for internal double taxation are applicable for at least 85% of their income, the minimum advance tax payment may not be under 6% of their profits. Advance tax payments of partially-exempt companies (Section 9.3 of the CIT Act) which apply the special tax regime established in Chapter XV, Title VII of the CIT Act, are only calculated on positive taxable income for non-exempt income. 4 Please note that, broadly speaking, volume of transactions is only VAT-subject transactions whilst turnover is all transactions. There may therefore be some significant differences between the two figures due to, for example, accruals, dividends received by holding companies, etc. 5

6 In addition, the following special rules should be met: - Companies that apply the special tax regime established in Law 49/2002 for non-profit making organisations and tax relief for sponsorships (Section 28.4 of the CIT Act) should make advance tax payments but they are not subject to the minimum advance tax payment rule. - Variable capital investment companies, financial investment funds, real estate investment companies, real estate investment funds, the mortgage market regulation fund and pension funds that comply with certain requirements (Sections 28.5 and 28.6 of the CIT Act) do not have to make advance tax payments. - Listed companies that make investments in the real estate market (SOCIMIs, regulated in Law 11/2009, of 26 October 2009) should make advance tax payments, but they are not subject to the minimum advance tax payment rule. 8. Exit tax. Deferral rules. A judgment of the Court of Justice of the European Union dated 25 April 2013, for case C-64/11, considered that Spanish CIT exit tax rules were an infringement of the freedom of establishment. In accordance with these rules, when the residence of a company established in Spain, or the assets of a permanent establishment located in Spain are transferred to another EU member state, unrealised gains are included in taxable income for the tax year, whereas there are no immediate tax consequences if these operations take place in Spain. As a result, Section 17 a) and c) of the CIT Act were amended. With the new text of this provision, the exit tax on these types of transfers may be deferred at the request of the taxpayer until the assets are transferred to a third party. To defer the tax, the taxpayer should provide the tax administration with a guarantee. In addition, late payment interest is accrued during the deferral period. However, according to the EU Court of Justice, establishing that the deferral can only be made if a guarantee is furnished is an infringement of the freedom of establishment. This amendment of the CIT Act takes effects for tax years starting on or after 1 January 2013 whereas no temporary limits are established for the application of the judgment of the EU Court of Justice. 9. Exit tax. Restructuring transactions. Section 84.1 a) and c) of the CIT Act have also been amended as a result of the EU Court of Justice s judgment to case C-64/11 (25 April 2013). These provisions of the Act established that gains arising from transfers of assets carried out as a result of the restructuring transactions established in Section 83 of the CIT Act should not be included in taxable income until these assets are transferred to a third party. This requires that Spain does not lose its taxing rights on these unrealised gains. In this regard, under Section 84.1 a) of the CIT Act, gains related to assets that remain connected with a permanent establishment in Spain of non-resident companies may be deferred, but when such assets are transferred outside Spain, the capital gain will be included in the taxable income of the tax year. Under Section 84.1 c) of CIT Act, gains arising from transfers by a non-resident company of a permanent establishment in Spain may also be deferred, but when the acquiring company is not resident in Spain, the deferral will only affect assets that remain connected with a permanent establishment in Spain. 6

7 In both cases, the transfer of assets outside Spain implied that the unrealised gains were taxed. With the amendment, effective for tax years starting on or after 1 January 2013, when assets are transferred to another EU member state 5, the exit tax may be deferred as long as the taxpayer provides the tax administration with a guarantee. Late interest is accrued during the deferral. II. PERSONAL INCOME TAX REFORMS 1. Reduction of net taxable income generated by business activities for job creation and maintenance: extended to 2014 The reduction of net taxable income generated by business activities for job creation and maintenance is extended to Taxpayers carrying on business activities who generate turnover under 5 million and who have, on average, under 25 employees during the year may reduce their net taxable income by 20% when they create or maintain jobs, up to the limits and under the conditions established in existing legislation. 2. Investments made and expenses incurred to train staff in the use of new technologies: extended to 2014 The existing tax treatment of investments made and expenses incurred to train staff in the use of new communication and information technologies is maintained for Therefore, when such technologies can only be used outside the workplace and outside working hours, the tax treatment of these investments and expenses is as follows: a) For Personal Income Tax ( PIT ) purposes, the corresponding amounts are training expenses. The staff do not receive a benefit in kind. b) For CIT purposes, the employer may apply a tax credit for staff training expenses. 3. Adjustments of acquisition value for 2014 The General State Budget Act for 2014 increases by 1% the rates applied to adjust acquisition values for transfers of real estate not used for business activities made in These rates are applied in accordance with Section 35.2 of the PIT Act (provisions have the same terms as those of prior legislation). 4. Extension of the supplementary tax to the gross state tax liability applicable in 2012 and 2013 to General taxable base. The levying of the supplementary tax to the gross state tax liability applicable in 2012 and 2013 is maintained in Therefore in 2014 the gross state tax liability for the general taxable base will be increased by the supplementary tax shown in the following table: 5 As explained above, both the date of effect and the fact that the deferral is conditional on a guarantee being furnished may not be in accordance with EU law. 7

8 Net general taxable base (Up to Euros) Increase in gross state tax liability (Euros) Remaining net general taxable base (Up to Euros) Percentage of increase , , , , , , , , , , , , , ,000, , , Remainder 7 The amount resulting in accordance with the tax scale given in the table above is reduced by the amount resulting from applying this same scale to the net general taxable base for the tax-free personal and family allowance. As a result of this reform, the state tax scale for the net general taxable base for 2014 is generally as follows: Net general taxable base (Up toeuros) Net tax liability (Euros) Remaining net general taxable base (Up to Euros) Tax rate applicable (Percentage) , , , , , , , , , , , , , , , , , , Remainder 30.5 Regarding the autonomous communities/additional tax scale, in accordance with the provisions of the Spanish Law 22/2009, the scales approved for each autonomous community and city of Spain with a statute of independence will apply. Finally, in 2014, persons residing outside Spain who are taxed by PIT as they fall under the cases established in Sections 8.2 and 10.1 of the PIT Act (transfer of residence to a tax haven or certain members of Spanish diplomatic offices or consulates) are taxed in accordance with the state tax scale plus the aforementioned supplementary tax and with the special tax scale established in Section 65 of the PIT Act. 5. Extension of the supplementary tax to the state tax liability applicable in 2012 and 2013 to Savings taxable base In addition, the levying of the supplementary tax to the gross state tax liability for the savings taxable base applicable in 2012 and 2013 is maintained in Therefore in 2014 the gross state tax liability for this taxable base will be increased by the supplementary tax shown in the following table (for the part that does not correspond, if the case, to the tax-free personal and family allowance): 8

9 Net savings taxable base (Up to Euros) Increase in gross state tax liability (Euros) Remaining net savings taxable base (Up to Euros) Percentage of increase 0 0 6, , , , Remainder 6 Therefore, the total rates applicable to savings taxable income are: Net savings taxable base (Euros) Rate applicable (Percentage) Between 0 and 6, Between 6,000 and 24, Over 24, Continuation in 2014 of the increased withholding rates applicable to employment income The increased tax scale and rates of withholding applicable to employment income in 2012 and 2013 are maintained in Therefore, the tax scale and rates of withholding applicable in 2014 for employment income will generally be as follows: Base to calculate the rate of withholding (Up to Euros) Withholding (Euros) Remaining base to calculate the rate of withholding (Up to Euros) Rate applicable (Percentage) , , , , , , , , , , , , , , , , , , Remainder Continuation in 2014 of the increased withholding rate applicable to employment income obtained by directors The increased rate of withholding applicable to employment income obtained by directors and members of boards of directors, boards or committees representing such directors and other 9

10 representative bodies in 2012 and 2013 is maintained in Therefore, the withholding rate applicable in 2014 in this case is 42% instead of 35%. 8. Increase of certain rates for advance tax payments The increase of the following rates of advance tax established in Sections 92.8 and 101 of the PIT Act from 19% to 21% is maintained in 2014: - The rate of advance tax (and withholding) on investment income. - The rate of advance tax applicable to income from professional activities established in regulations implemented under the PIT Act on which the 9% rate does not apply. - The rate of advance tax on capital gains generated from transfers or payments of shares of joint investment institutions. - The rate of advance tax (and withholding) on capital gains generated from forestry or persons residing in public woodland which are established in the regulations implemented under the PIT Act. - The rate of advance tax (and withholding) on prizes awarded in games, competitions, lotteries or promotional draws, whether or not they are linked to the offer, promotion or sale of certain goods, products or services. - The rate of advance tax (and withholding) on income generated from leases or sub-leases of urban real estate, irrespective of the type of property and how it is referred to. - The rate of advance tax (and withholding) on income generated from intellectual or industrial property, provision of technical assistance, lease of movable property, businesses or quarries and the sub-lease of the aforementioned property, irrespective of the type of property and how it is referred to. - The rate of advance tax applicable to amounts allocated to transfers of image rights by PIT taxpayers who have an employment relationship with a person or company if the taxpayers have transferred to such person or company the right to trade on or the consent or authorisation to use their image in acts with persons or companies resident or not resident in Spain, when this tax allocation should be made in accordance with the provisions of Section 92.8 of the PIT Act. - The rate of advance tax applicable to income generated from teaching courses, conferences, symposia, seminars and the like, or from the production of literary, artistic or scientific work, provided that the right to trade on such works is transferred. III. NON-RESIDENTS INCOME TAX REFORMS 1. Tax rates applicable in 2014 The General State Budget Act for 2014 extends the increased Non-Residents Income Tax (NRIT) rates applicable in 2012 and 2013 to Therefore, the applicable rates in 2014 are as follows: a) The general tax rate has increased from 24% to 24.75%. 10

11 b) The following income is taxed at the 21% tax rate instead of the general 19%: - Dividends and other income generated from holding interests in companies. - Interest and other income generated from transferring the taxpayer s own capital to third parties. - Capital gains generated from transfers of assets. c) The tax rate of the supplementary tax which is payable when income obtained by permanent establishments of non-resident companies is transferred outside Spain, with the established exceptions, is 21% (previously 19%). The other specific rates established in Section 25 of the NRIT Act(for pensions and similar benefits, reassurance operations, etc.) remain the same. It is important to note that withholdings and tax advances should generally be in line with the amounts resulting from applying the provisions of the NRIT Act regarding the calculation of tax (or, if the case, the provisions of a double tax convention). Consequently, the increase of tax rates also implies a correlative increase of withholdings. IV. WEALTH TAX REFORMS 1. Levying of Wealth Tax for 2014 Wealth tax continues to be levied in 2014 and a measure which was claimed to be exceptional is therefore maintained for a further year, notwithstanding the powers of governmental bodies of autonomous regions in Spain to legislate otherwise. V. VALUE ADDED TAX (VAT) REFORMS 1. Tax exemption applicable to supplies of services closely related to the protection of children and adolescents With effect from 1 January 2014, Section 20.8 of the VAT Act which declares certain welfare services exempt of VAT when they are provided by bodies regulated under public law or by private bodies dedicated to social welfare, is amended. The amendment is made to the provisions of point a) of Section 20.8 (services closely related to the protection of children and adolescents) and in particular to the tax exemption applicable for child custody and care activities, regarding which the limit of children up to six years of age previously established is eliminated. 2. Place of supply of services. Closure rule. Section 70.2 of the VAT Act, which contains a closure rule regarding the place of supply of services, is reformed. Under the rule in force up to 31 December 2013, the place of supply of certain services was considered to be Spanish VAT territory when, in accordance with VAT rules, these services were not supplied in EU territory, the Canary Islands, or Ceuta and Melilla and they were effectively used and enjoyed in Spanish VAT territory. 11

12 The provision in force as from 1 January 2014 does not contain any reference to the Canary Islands or Ceuta and Melilla. Therefore, services are understood to be supplied in Spanish VAT territory when they are effectively used and enjoyed in this territory and, under VAT rules, they are not supplied in the EU. The services to which this rule applies are: - Those stated in Section 69.2 a) to m) of the VAT Act when they are supplied to an entrepreneur or self-employed professional worker acting as such and those stated in Section 69.2 n ) irrespective of the recipient, i.e. services that are not supplied in the EU, and that, under VAT special location rules, are supplied in Spanish VAT territory as they are effectively used and enjoyed in such territory. - Services supplied by an intermediary acting on behalf of another person when the services are supplied to an entrepreneur or self-employed professional worker. - The hiring-out of means of transport. 3. Transfers by taxpayers of tangible fixed assets forming part of their business assets to another EU Member State. Accrual rule. The following special VAT accrual rules are eliminated with effect from 1 January 2014: - Rules applicable to transfers by taxpayers of tangible fixed assets forming part of their business assets to another EU member state. - Rule regulating the use by an entrepreneur or self-employed professional worker, for the purpose of their businesses, of goods dispatched or transported by or on behalf of such entrepreneur or professional worker from another EU member state where the goods were produced, extracted, processed, purchased or imported by that entrepreneur or professional worker for the purpose of their businesses. Under the rules in force up to 31 December 2013 for the transactions stated above, VAT was accrued when the dispatch or transportation started in the EU member state. With the elimination of these special rules, these transfers will follow the general accrual rule which states that VAT is accrued when goods are placed at the disposal of the purchaser or when intra-community supplies of goods (or supplies which are considered to be the same as intra-community supplies of goods) are carried out under applicable law. 4. Adjustment of output VAT liabilities With effect from 1 January 2014, Section of the VAT Act is amended. With this amendment, output VAT liabilities may not be adjusted in the following cases: - When the reasons for the adjustment are not any of those established in Section 80 of the VAT Act, the adjustment gives rise to an increase of output VAT and the recipient of the supplies of goods or services is a not an entrepreneur or self-employed professional worker acting as such, with the exception of a lawful increase of VAT rates, in which case the adjustment may be carried out in the month when the increase takes place and the following month. - When the adjustment is made as a result of a tax settlement issued by the tax administration and the output VAT liabilities due and not charged are higher than the VAT liabilities declared by the taxpayer. In this case, the provisions in force up to 31 December 2013 required that the 12

13 taxpayer s actions constituted a tax infringement. The reform introduced by the State Budget Act prevents an adjustment from being made to output VAT in this situation when it can be proven by objective data that the taxpayer was involved in a fraudulent transaction or that the taxpayer knew or should have known, using reasonable diligence, that the transaction was connected to a fraud General pro-rata rule The general pro-rata rule established in Section of the VAT Act is amended with effect from 1 January The provisions in force up to 31 December 2013 stated that for the calculation of the percentage of deduction applicable under the general pro-rata rule, transactions carried out from permanent establishments outside Spanish VAT territory should not be included in the calculation either as numerator or denominator when the cost of such transactions is not assumed by permanent establishments situated in such territory. Under the new provisions applicable as from 1 January 2014, transfers carried out from permanent establishments outside Spanish VAT territory are not included when calculating the deduction percentage under the pro-rata rule irrespective of who assumes the cost of the transfer 7. VI. TRANSFER TAX AND STAMP DUTY With effect from 9 March 2014, date on which the Royal Decree-Law 4/2014 came into force, notarial instruments which contain remissions from or reductions of sums of loans, credits or other obligations of debtors included in refinancing agreements or out-of-court settlements of payments established in the Spanish Insolvency Act, are exempt from Transfer Tax and Stamp Duty when the taxpayer is the debtor. VII. LEGAL INTEREST RATE, LATE PAYMENT INTEREST RATE AND PUBLIC MULTIPLE EFFECT INCOME INDICATOR The legal interest rate and late payment interest rate will continue at their current rates of 4% and 5%, respectively, until 31 December The Public Multiple Effect Income Indicator (IPREM) also remains unchanged. The amounts of this indicator are as follows: a) Daily IPREM: b) Monthly IPREM: c) Annual IPREM: 6, d) When reference to the minimum inter-professional wage has been replaced by reference to IPREM in accordance with Royal Decree Law 3/2004, of 25 June 2004, the annual IPREM is 7, if the relevant rules refer to the minimum inter-professional wage in the annual calculation, unless extraordinary salary payments are expressly excluded, in which case the amount is 6, The EU Court of Justice has recognised the right of EU member states to react to fraudulent situations regarding VAT when it can be ascertained, taking objective factors into consideration, that taxpayers knew or should have known that they were participating in a transaction where there was a fraudulent evasion of VAT. The cases analysed by the EU Court of Justice concern the right to deduct input VAT. In these situations, the EU Court of Justice has considered that refusing that the taxpayer was entitled to deduct VAT was lawful. Judgments of the Court for these cases include the judgment dated 6 July 2006, for joint cases C-439/04 and C-440/04 (Axel Kittel) and the judgment of the Court dated 21 June 2012 for the joint cases C-80/11 and C-142/11 (Mahagében Kft. and Péter Dávid). 7 The reform is made due to the judgment of the EU Court of Justice dated 12 September 2013 for case C 388/11 (Crédit Lyonnais). As the judgment does not temporary limit its effects, it may be applied retroactively. 13

14 PwC Tax & Legal Services Technical Department: Alberto Monreal Partner Ignacio Quintana Director María Lourdes López Senior Associate Eva Mur Senior Associate This document has been prepared for general guidance on matters of interest only and does not constitute professional advice. You should not act upon the information contained in this document without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this document, and, to the extent permitted by law, Landwell- PricewaterhouseCoopers Tax & Legal Services, S.L., its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this document or for any decision based on it Landwell-PricewaterhouseCoopers Tax & Legal Services, S.L. All rights reserved. PwC refers to Landwell-PricewaterhouseCoopers Tax & Legal Services, S.L., member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. 14

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