(iv) proceeds from reinsurance transactions: 4%. Income received by non-resident entities operating without a permanent establishment in the country is not deemed to be Spanish source income and, therefore, is not subject to CIT in the following cases:

i) Interest, dividends and capital gains or losses deriving from securities issued in Spain by individuals or companies without residence and permanent establishment in Spain;
ii) Interest and capital gains deriving from Debt issued by the Spanish State;
iii) Interest and capital gains deriving from movable property (e.g., shares, bonds, etc.) received by entities with residence in any EC country. This benefit does not apply to capital gains stemming from sales of shares, participations or other rights in a Spanish company or entity in the following cases:

(iii.1) if the assets of such company, juridical person or entity consist principally, directly or indirectly, of immovable property located in Spain;
(iii.2) if the tax payer has held 25% or more of the share capital of such company, juridical person or entity within the period of 12 months prior to sale.

The foregoing does not apply to interest or capital gains deriving from Spanish public debt and moveable property obtained by entities through countries or territories which by regulation are deemed to be tax havens (see list in footnote 35).

Non-resident entities not operating through a permanent establishment in Spain are also required to appoint representatives for CIT purposes in Spain. The appointment must be notified to the Tax Department within two months following the date of the appointment. Non-compliance with these obligations may result in fines being imposed ranging from 25,000 to 2,000,000 pesetas (see footnote 55).

5.2 Taxation of Individuals.

Incomewise, individuals are subject to the Impuesto sobre la Renta de las Personas Fisicas (Personal Income Tax, or PIT) but the situation differs whether they are residents or not in Spain, and in the latter case whether they obtain income in the country through a permanent establishment or not.

5.2.1 Residents in Spain

As the fiscal section of these articles is intended above all for non-residents wishing to invest in Spain but who do not intend to take up residence in this country, a very general description of PIT as applicable to resident individuals is made herein.

An individual is deemed to be a resident for PIT purposes if he remains in Spain for more than 183 days in one calendar year. He is thus liable to PIT under so called personal obligation. This means that he will be liable to income tax for all income received from Spain and elsewhere, i.e., on a worldwide basis.

From fiscal 1992, an individual is also deemed to be a resident for PIT purposes if the main nucleus or the base of his professional or business activities or of his economic interests are in Spain (57). It will be presumed that, unless proved otherwise, the taxpayer has his/her habitual residence on Spanish territory, when his/her not legally separated spouse and dependant underage children usually live in Spain.

From fiscal 1992, capital gains are taxed as "irregular" income whenever the assets from the sale of which the capital gains arise have been acquired by the seller at least one year before. The amount of the capital gains arising from assets acquired at least two years before the date of transfer will be determined according to the following rules:
(i) as a general rule, the capital gain will be reduced by 7.14% for each year exceeding two that the asset transferred was in the possession of the seller;
(ii) in the case of listed shares (with the exception of securities investment companies' shares), the capital gain will be reduced by 11.11% for each year exceeding two that the shares transferred were in the possession of the seller;
(iii) in the case of immovable property, rights over same or shares of companies whose assets are made up of real property in at least 50%, the capital gain will be reduced by 5.26% for each year exceeding two that the property or the shares transferred were in the possession of the seller;

Capital gains are exempt whenever the assets referred in items (i), (ii) and (iii) remain in the possession of the seller during more than 15, 10 or 20 years, respectively.

The purchase cost is made up of a number of items (real price paid, investments and improvements made in the assets and expenses and taxes paid by the buyer, if any). The difference between the purchase cost and the sale price agreed by the parties (or the "market" value should this be higher), reduced as indicated above, is the taxable base.

There are special rules for establishing the capital gains. The main ones concern listed and unlisted shares. Capital gains deriving from the sale of listed shares or participations in companies are established by the difference between the acquisition cost and the transfer price as determined by the relevant quotation on the closing date or the price agreed between the parties if such price were higher.

Capital gains deriving from the sale of unlisted shares or participations in companies are established by the difference between the acquisition cost and the price effectively received by seller. If such price is not deemed to be at arms' length, the Tax Authorities will take as transfer price the highest of the following: (i) the book value, as it results from the latest balance sheet approved; and (ii) the value resulting from the capitalization at the rate of 12.5% of the average profits made in the last three fiscal years.

For fiscal 1995 (58), individuals are not required to file a tax return if their income stemming from personal work, or made up of interest, dividends and capital gains, is less than 1,100,000 pesetas in total, although interest, dividends and capital gains combined cannot exceed 250,000 pesetas gross per year. In the event that husband and wife have chosen to file separate tax returns, the rates start at 20% and go up to 56% for 9,885,000 pesetas or more. If husband and wife have chosen to file a joint return, the above mentioned threshold goes up to 1,200,000 pesetas. In this case, the rates start at 20% and go up to 56% for 11,387,000 pesetas or more. PIT recognizes a number of rebates, allowances and reductions. PIT is closely connected to Wealth Tax (see concept and scale in 4.3.2.2 above) in that the total liability under PIT and Wealth Tax cannot exceed 70% of the taxable base under PIT.

5.2.2 Non-residents in Spain

5.2.2.1 Operating in Spain without a permanent establishment. PIT is levied on all Spanish source income received by non-resident individuals who do not act in Spain by means of a permanent establishment. Non-residents are also subject to Wealth Tax as explained above (see 4.3.2.2).

Similarly to foreign companies, an individual is deemed to have a permanent establishment in Spain whenever he has in the Spanish territory headquarters, branches, offices, factories, workshops, installations, warehouses, shops or other establishments; construction, installation or assembly projects lasting for more than 12 months, agencies or representative offices which are authorized to contract in his name, or mines, quarries, gas or oil wells, farming, cattle and timber businesses or any other place intended for extraction of natural resources, or if he performs professional or artistic activities or has other places of business where he performs his activity in whole or in part.

Consequently, an individual would not be receiving income by means of a permanent establishment in Spain, but without one, if he does not fall in any of the situations listed above.

The foregoing concept of permanent establishment has been laid down by Spanish tax law. If the particular case falls within the scope of one of the many treaties signed by Spain to avoid double taxation, the concept "permanent establishment" as laid down in the applicable treaty would prevail. Generally, the concepts are very similar.

Applicable tax rates to income obtained without a permanent establishment are:
(i) The general rate applicable to dividends, interest, commissions, etc. is 25%; in the case of services, technical assistance, assembly and installation projects related to engineering contracts, and in general the carrying out of business in Spain without a permanent establishment, the 25% rate will be applied to the difference between the gross income and certain deductible expenses (personnel and materials employed or incorporated in construction or assembly);
(ii) the rate applicable to participations in general expenses which for these purposes are regarded as income received by the "parent company" (in this case the individual): 14%;
(iii) pensions not exceeding 1,500,000 pesetas: 8%;
(iv) salaries earned by employees working for Spanish Embassies and Consulates outside Spain, provided such employees are not subject to PIT under so called personal obligation and international treaties providing otherwise are inapplicable: 8%;
(v) capital gains (so called increases in wealth) are subject to a flat 35% rate. Capital gains are to be determined in accordance with the general provisions of PIT. For fiscal 1992 and thereafter, the fiscal regime is very similar to the one described in Section 4.2.1 above. The amount of the capital gains arising from assets acquired at least two years before the date of transfer will be determined according to the following rules:
(v. i) as a general rule, the capital gain will be reduced by 7.14% for each year exceeding two that the asset transferred was in the possession of the seller;
(v.2) in the case of listed shares (with the exception of investment companies' shares), the capital gain will be reduced by 11.11% for each year exceeding two that the shares transferred were in the possession of the seller;
(v.3) in the case of immovable property, rights over same or shares of companies whose assets are made up of real property in at least 50%, the capital gain will be reduced by 5.26% for each year exceeding two that the property or the shares transferred were in the possession of the seller.

(57) Law 18/1991 of June 6th, published on June 7th 1991.
(58) Law 41/1994, of December 30.

The content of this article is intended to provide a general guide to the subject matter.
Specialist advice should be sought about your specific circumstance.

For further information contact Mr. Jorge Angell, L. C. Rodrigo Abogados, Madrid (Spain)
Fax: 010 341 576 6716 or enter text search 'L C Rodrigo Abogados' and 'Business Monitor'.

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