1. Upcoming measures regarding environmental taxation and modifications to corporate income tax on portfolio impairment and losses abroad

Losses due to impairment of securities portfolios and negative income obtained abroad through permanent establishments are established as non-deductible expenses, measures that will primarily affect large companies. In addition, a tax is levied on fluorinated greenhouse gases, following European Union recommendations to increase environmental taxation.

The Council of Ministers has approved the submission to the Spanish Parliament of a draft bill establishing certain measures regarding environmental taxation and adopting other tax and financial measures affecting Corporation Tax. Urgent parliamentary procedure has been requested for its processing.

1.1. Changes in Corporate Income Tax

The deductibility of impairment losses on equity investments in listed and unlisted entities is eliminated, following the lead of other European Union countries. This measure, which will increase the tax base, while applicable to all companies, will have a greater impact on large corporations, which are those with significant holdings in other companies based in Spain or abroad.

Consequently, losses incurred abroad through a permanent establishment are considered non-deductible expenses, except in the case of the transfer of the establishment or the cessation of its activity. A transitional regime will be established applicable to tax periods beginning before January 2013, so that losses deducted before January 1, 2013, will also be reversed upon the distribution of dividends by the investee entities.

Similarly, the temporary measures established in 2012 for Corporate Income Tax, which expire in December 2013, are extended for 2014 and 2015. These measures affect, among other things, the minimum installment payment of 12 percent for entities with a turnover exceeding €20 million, the limitation on the offsetting of negative tax bases, and the limit on the deductibility of goodwill. The extension of these measures continues the reform undertaken the previous year to broaden the tax base for large companies.

1.2. New indirect tax on fluorinated greenhouse gases for 2014

On the other hand, and following the European Commission's recommendations on environmental taxes, the Draft Law establishes an indirect tax on fluorinated greenhouse gases. Taxpayers will include manufacturers of fluorinated gases, importers or intra-Community purchasers of these products, and resellers. The tax rate will be determined based on the global warming potential (GWP) of the products. This new tax will come into effect in 2014.

1.3. Other tax modifications

The Bill incorporates other tax modifications applicable to the Bank Restructuring Asset Management Company (Sareb). Specifically, it equates Sareb with a financial institution, exempting it from withholding taxes on loan transactions received from contributing entities.
Additionally, it establishes an exemption from Property Transfer Tax (ITP and AJD) for the creation of guarantees for financing real estate acquisitions.

2. The key points of the future law for entrepreneurs

Among other changes, companies with a turnover of less than €10 million will be able to deduct up to 10% of the profits earned during the tax period that are reinvested in the business. Furthermore, the cash basis accounting method is established for VAT, and a new business entity, the Limited Liability Entrepreneur (ERL), is created, through which liability arising from business debts will not affect the entrepreneur's primary residence if its value does not exceed €300,000.

The long-awaited Law to Support Entrepreneurs and Their Internationalization was presented to the Council of Ministers on May 24, within the 2013 National Reform Program. The draft bill has just been approved by Congress, after the introduction of a series of amendments, and will soon be submitted to a vote in the Senate.

The Draft Bill complements the Royal Decree Law of February 22, 2013 on labor measures to support entrepreneurs and stimulate growth and job creation, through which certain measures to support entrepreneurs were approved.

The purpose of the Law is to support entrepreneurs and business activity, promote their development, growth, and internationalization, and foster an entrepreneurial culture and an environment conducive to economic activity. It has a broad scope, considering all natural and legal persons engaged in productive economic activity as entrepreneurs.

For the time being, and without prejudice to any possible modifications that may be included in the draft text of the Bill, we will highlight the measures of greatest interest according to the report presented by the Government.

2.1. Support for entrepreneurial initiatives

A series of measures are included to promote entrepreneurial culture and to facilitate the start of business activities.

Limited Liability Entrepreneur

• A new business entity, the Limited Liability Entrepreneur (ERL), is created, through which liability arising from business debts will not affect the entrepreneur's primary residence if its value does not exceed €300,000. To adequately protect creditors and ensure the security of legal transactions, appropriate measures are put in place for registering the limitation of liability.
• However, the limitation of liability will not apply to debts under public law, nor when the business owner has acted fraudulently or with gross negligence in fulfilling his obligations to third parties.

Limited Liability Company with Successive Formation: a new corporate subtype

• To reduce the initial cost of setting up a company, companies can now be created with capital of less than 3,000 euros (it will not need a minimum initial capital of 3,000 euros as before, so it can be created with a minimum cost of 1 euro), with a regime identical to that of limited liability companies, except for certain specific conditions aimed at protecting the interests of third parties, among which the limits on the remuneration of partners and directors stand out, as well as the joint and several liability of the partners in case of liquidation.

Entrepreneur Support Points

• In order to expedite the start of entrepreneurial activity, Entrepreneur Support Points are created, which will be one-stop shops through which the procedures for the start, exercise and cessation of business activity can be carried out.
• On the other hand, entrepreneurs will be able to set up quickly, either as limited liability entrepreneurs or as a company, through simplified models and online systems.

Second chance: out-of-court payment agreement

• An out-of-court debt negotiation mechanism is planned for businesses, whether they are individuals or legal entities.
• The procedure is very flexible and is carried out, extrajudicially, in short periods before a commercial registrar or a notary, although these will be limited to appointing a suitable and independent professional to promote the agreement and ensure that the publication and registration requirements necessary to successfully complete the purposes pursued with the settlement are met.
• It is expected that debt reductions of up to 25% of the loans and payment deferrals of up to 3 years may be agreed upon, except in the case of public law loans, where their unavailability only allows for the postponement of payment.
• Nor can those loans and credits that have a very special guarantee such as the real guarantee be affected, which, in the same way as those of Public Law, cannot be affected by the extrajudicial agreement.
• Finally, for the self-employed and the new Limited Liability Entrepreneur, the extension of the period between the notification of the first seizure order and the actual execution of the auction, the competition or any other administrative means of alienation is foreseen, from one to two years, when it affects the habitual residence of a self-employed person, in the case of seizure proceedings for tax debts or with Social Security.

2.2. Fiscal measures to support entrepreneurs

VAT. Cash basis

• The possibility of adopting the cash basis accounting method for VAT is established
• Taxpayers whose turnover does not exceed two million euros may opt for this system, under which taxpayers can choose a system that postpones the accrual and the consequent declaration and payment of VAT charged on most of their commercial transactions until the time of collection, in whole or in part, from their customers.
• However, taxpayers will also see the deduction of VAT paid on their purchases delayed until they make payment to their suppliers.

Promoting the reinvestment of profits in economic activity

• Companies with a turnover of less than €10 million will be able to deduct up to 10% of the profits earned during the tax period that are reinvested in their business activity. This scheme will also apply to the self-employed.

Tax incentives for quality growth through business innovation

• R&D&I deductions that can be applied in a given year can be recovered through a single refund system in Spain.
• This deduction is not subject to any limit on the full amount of Corporate Income Tax and, where appropriate, the R&D deduction will be paid, with a maximum joint limit of three million euros per year, although with a discount rate with respect to the amount initially planned for the deduction, provided that the R&D activities and employment are maintained.

Tax incentives for the transfer of intangible assets (“Patent Box”)

• The tax regime applicable to income from certain intangible assets is being modified. Specifically, the incentive is intended to apply to the net income derived from the transferred asset, rather than to the revenue generated from it.
• The income obtained from its transfer will enjoy a reduction of up to 60%.
• Furthermore, the application of the tax regime is extended to assets acquired, under certain limitations, and to cases of transfer of intangible assets.

Tax incentives for "business angels"

• In order to encourage newly created or recently established companies to raise equity capital from taxpayers who, in addition to financial capital, contribute their business or professional knowledge suitable for the development of the company in which they invest (local investors or "business angels"), or from those who are only interested in contributing capital ("seed capital"), a new tax incentive is established in the Personal Income Tax (IRPF):
  • A 20% deduction on the state portion of the Personal Income Tax (IRPF) is available for investments made upon joining the company. The maximum deduction is €20,000 per year.
  • Full exemption from capital gains tax upon leaving the company, provided that it is reinvested in another newly created or recently established entity.

2.3. Measures to support financing for entrepreneurs

• The Insolvency Law is amended in the pre-insolvency matters of refinancing agreements with a dual purpose: firstly, to regulate in a more complete and flexible manner the registration procedure for the appointment of experts; secondly, to include a more flexible and clearer rule for calculating the majority of the liabilities that subscribe to the agreement and required as a minimum legal requirement for its optional judicial approval .
• Additionally, the regulatory framework for internationalization bonds is being improved, adding more clarity to the assets that serve as coverage.
• On the other hand, a new instrument, the "internationalization bonds", is created in order to add greater flexibility to the issuance of securities that are covered by loans linked to internationalization.

2.4. Measures to promote business growth

Reduction of administrative burdens

• To reduce the administrative burdens faced by entrepreneurs, Public Administrations must ensure that they eliminate at least one administrative burden for every one they introduce, and always at an equivalent cost.
• The possibility is opened for businesses to legalize their mandatory books electronically in the Commercial Registry.
• The Law on urgent measures for the liberalization of trade and certain services, of December 26, 2012, is amended to expand the maximum surface area threshold of establishments that will be exempt from a municipal license, as well as to expand the list of activities exempt from applying for a municipal license.
• In the field of accounting, the financial reporting requirements for companies are being streamlined. The maximum thresholds for preparing abridged balance sheets are being raised, expanding the number of companies that can prepare abridged balance sheets, notes to the financial statements, and statements of changes in equity, and that are exempt from preparing a statement of cash flows.

Elimination of obstacles to entrepreneurs' access to public procurement

• To connect small entrepreneurs engaged in the same activity, the possibility is foreseen that entrepreneurs can register in the Official Register of Bidders and Classified Companies of the State.
• The thresholds for classification requirements in works and services contracts have been raised, addressing a significant obstacle for many companies, particularly smaller or newly established ones, as they struggle to meet all the necessary qualifications. Specifically, the threshold for works contracts has been increased by €150,000, from €350,000 to €500,000, and by €80,000 for services contracts, from €120,000 to €200,000.
• It is expected that the guarantee in construction contracts can be established by withholding the price and the deadlines for the return of guarantees are shortened, going from 12 months to 6 months in the case that the winning company is a small and medium-sized enterprise.
• In order to combat late payments, the grace period for requesting termination of the contract is reduced from 8 to 6 months if the winning company is an SME, and a new article is included to establish greater control over the payments that winning contractors must make to subcontractors.

2.5. Promotion of the internationalization of Spanish companies and the economy

Institutional framework and instruments to support internationalization

• Every two years, the Ministry of Economy and Competitiveness will develop a Strategic Plan for the Internationalization of the Spanish Economy, which will include geographical and sectoral priorities and action plans of the bodies with competence in the matter.
• An evaluation and control system will be established for the instruments that make up the Plan, the results of which will be public and will serve for future regulatory and management modifications.
• The actions of the external and territorial network of the Ministry of Economy and Competitiveness are enhanced, and the role of ICEX Spain Export and Investment is strengthened as an organization to promote the internationalization and competitiveness of Spanish companies in all phases of this process.
• Regarding the reforms of the financial instruments supporting internationalization, the design of the Fund for Investments Abroad (FIEX), the Fund for the Internationalization of the Company (FIEM) and the Agreement for Reciprocal Adjustment of Interests (CARI) are improved.
• Finally, the necessary mechanisms are being developed to give Spanish companies greater access to projects open for tender by International Financial Institutions in other countries.

Attracting talent and investment: new visa and residence permit regime

The granting of residence permits for reasons of economic interest is facilitated and expedited through a streamlined and rapid procedure, before a single authority, to individuals who qualify as:

• Investors who make a significant economic investment or one intended for business projects considered and accredited as being of general interest; for example, due to their impact on job creation or their contribution to scientific and/or technological innovation.
• Entrepreneurs with an innovative activity of particular economic interest. Priority will be given to job creation, in addition to the applicant's professional profile, business plan, and added value for the Spanish economy.
• Highly qualified professionals:
  • Management personnel, highly qualified or who are part of a business project of general interest.
  • Postgraduates from prestigious universities and business schools.
  • Professionals who wish to carry out research, development and innovation activities in public or private entities.
• Intra-company transfer: foreigners who move to Spain within the framework of an employment, professional relationship or for professional training purposes, for a duration equal to that of the transfer.

3. New ruling from the TEAC (Central Economic-Administrative Court) to consider real estate leasing as a business activity

According to the Central Economic-Administrative Court (TEAC), real estate rental can be considered as a business activity "without a person and premises" and there may also be no business activity even if there is a "person and premises".

We inform you that the TEAC, in two important Resolutions of December 20, 2012, regarding Corporation Tax, states that the requirements of person and premises are only indications of the performance of an activity, and that therefore, it is possible that even having a person and premises, an economic activity is not carried out; or that without having a person and premises there is "organization of means", and therefore, economic activity.

What the Personal Income Tax Law says: leasing as an economic activity

The Personal Income Tax Law, to which numerous regulations refer for these purposes, establishes that for the leasing of real estate to be an economic activity, there must be a premises where the activity is carried out and a full-time employee to manage it.

The Directorate General of Taxes and the Courts have discussed on numerous occasions the scope and sufficiency of these requirements without having a uniform position.

What the TEAC says now in its Resolutions of December 20, 2012

In the matter discussed before the TEAC, concerning an entity that carries out an economic activity of real estate development, in addition to leasing properties (an activity that does not meet the requirements to be classified as an "economic activity"), it states that the requirements of person and premises are only indications of the performance of an activity, and that therefore, it is possible that even having a person and premises, an economic activity is not carried out; or that without having a person and premises, there is "organization of means", and therefore, economic activity.

Specifically, in one of the cases presented it was concluded that no economic activity was carried out because the premises were not suitable for carrying out the activity, the worker was employed as a computer technician and the exercise of the activity had not been proven by other means of evidence.

The other concludes that, despite having a premises and a hired person, no economic activity is carried out insofar as the premises are open-plan and it has not been proven that an individualized part of it is intended for the exclusive development of the activity.

Regarding the person hired, it is also not considered valid for these purposes insofar as the management of the activity was actually carried out by a property agent.

4. Tax incentives to promote business creation and self-employment under the self-employed scheme

Royal Decree-Law 4/2013 contains a series of fiscal, labor, commercial and administrative measures to support entrepreneurs and stimulate growth and job creation, and in the tax field these are specified in a series of tax incentives in Personal Income Tax and Corporate Income Tax to support entrepreneurial projects and to promote self-employment under the self-employed regime during the first two years of carrying out an activity.

4.1. Tax incentives

Corporate Income Tax

Incentives for newly created entities

Newly created entities, established from 1 January 2013 onwards, that carry out economic activities will be taxed, in the first tax period in which the taxable base is positive and in the following one, according to the following scale, unless, in accordance with the Corporate Income Tax Law, they must be taxed at a rate different from the general one:

• For the portion of the taxable base between 0 and 300,000 euros, at a rate of 15%.
• For the remaining portion of the taxable base, at a rate of 20%.

When the tax period is less than one year, the portion of the taxable base that will be taxed at the rate of 15% will be the result of applying to 300,000 euros the proportion in which the number of days of the tax period is divided by 365 days, or the taxable base of the tax period when this is lower.

When the taxpayer is subject to the installment payment method established in section 3 of article 45 of the Law (base method), the above scale will not apply in the quantification of the installment payments.

For these purposes, an economic activity will not be considered to have begun:

• When the economic activity has been previously carried out by other related persons or entities and transferred, by any legal title, to the newly created entity.
• When the economic activity has been carried out, during the year prior to the constitution of the entity, by a natural person who holds a direct or indirect participation in the capital or in the own funds of the newly created entity of more than 50 percent.

Entities that are part of a group, regardless of their residence and the obligation to prepare consolidated annual accounts, will not be considered newly created entities.

4.2. Personal Income Tax

Exemption from unemployment benefits in the form of a lump sum payment

Effective from 1 January 2013, the Personal Income Tax Law is amended to establish that all unemployment benefits received as a single payment are exempt from Personal Income Tax (previously the exemption was quantitatively limited, as it only reached up to €15,500), subject to the following requirements:

• The exemption applies to unemployment benefits recognized by the respective managing entity when they are received in the single payment modality established in Royal Decree 1044/1985, of June 19, which regulates the payment of unemployment benefits in its single payment modality.
• The benefit received must be used for the purposes and cases provided for in the Royal Decree mentioned in the previous requirement.
• For the exemption to be consolidated, it is necessary to maintain the investment, either in the worker company or in the worker cooperative, or in the commercial entity in which capital has been contributed, or in the economic activity undertaken as a self-employed person, for a minimum period of 5 years.

As a consequence of the full exemption of unemployment benefits received as a lump sum, the special rule for the timing of the recognition of these benefits is eliminated. Under this rule, such benefits could be recognized in each tax period in which, had the benefit not been received as a lump sum, the taxpayer would have been entitled to it (in proportion to the time the taxpayer would have been entitled to the benefit in each tax period). Therefore, the general rule for the
timing of the recognition of employment income will apply, which is that the benefit is recognized in the period in which it becomes due.

20% reduction in net income for starting an economic activity

Effective from 1 January 2013 and in accordance with the measure adopted in the Corporate Income Tax, it is established that taxpayers who start the exercise of an economic activity from 1 January 2013 and determine the net income of the same according to the direct estimation method, may reduce by 20% the positive net income of said activity, reduced where appropriate by the corresponding reductions, in the first tax period in which it is positive and in the following tax period.

An economic activity is considered to have begun when no economic activity has been carried out in the year prior to its start date, without taking into account those activities in which the exercise has ceased without having obtained positive net income since its beginning.

This reduction may also be applied when, after the start of the activity, a new activity is started without having ceased the exercise of the first one; in this case, the reduction will be applied to the net income obtained in the first tax period in which it is positive and in the following tax period, counting from the start of the first activity.

The amount of net income to which the reduction will be applied may not exceed 100,000 euros per year.

This reduction will not apply in the tax period in which more than 50% of the income of the same comes from a person or entity from whom the taxpayer had obtained employment income in the year prior to the start date of the activity.

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MGI Àmbit

A Àmbit Assessor, SL has 40 years dedicated to the tax, comptable and labor consultancy of the Pime.

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