4.2.53 Codes 00256 and 00278 exemption from foreign income (Art. 22 LIS)

Article 22 of the LIS regulates the exemption of certain income obtained abroad through a permanent establishment.

In application of the provisions of said article, the taxpayer must make the following adjustments in codes [00256] and [00278] "Exemption of income abroad (art. 22 LIS)" on page 13 of form 200.

Article 22.2 of the LIS already established that negative income obtained abroad through a permanent establishment will not be included in the tax base, but for tax periods starting from January 1, 2017, it establishes that negative income derived from the transfer of the permanent establishment will not be included in the tax base either.

Therefore, based on the provisions of this article, the entity must include in the key [00256] of increases the amount corresponding to said negative income.

However, Article 22.2 of the LIS establishes in its last paragraph that negative income generated in the event of cessation of the permanent establishment will be tax deductible. In this case, the amount of the negative income will be reduced by the amount of net positive income acquired previously, and which was subject to the application of an exemption or deduction regime to avoid double taxation, for the amount thereof.

Accordingly, the entity must include this amount in the [00256] increase key.

With regard to the regime regulated in article 22.1 and 2 of the LIS, it is necessary to take into account the transitional regime provided for in section 4 of the sixteenth transitional provision of the LIS according to which, in the event that a permanent establishment has obtained net negative income that has been integrated into the taxable base of the entity in tax periods beginning before 1 January 2013, the exemption provided for in article 22 of this Law or the deduction referred to in article 31 of this Law will only apply to positive income obtained subsequently from the moment in which it exceeds the amount of said negative income.

Likewise, section 5 of the sixteenth transitional provision of the LIS establishes another transitional regime for cases of transfer of a permanent establishment in tax periods beginning on or after 1 January 2016, according to which the taxable base of the transferring entity resident in Spanish territory will be increased by the amount of the excess of the net negative income generated by the permanent establishment in tax periods beginning before 1 January 2013 over the net positive income generated by the permanent establishment in tax periods beginning on or after this date, with the limit of the positive income derived from the transfer thereof.

In relation to the provisions of article 22.1 and 2 of the LIS, article 22.3 of said Law establishes that an entity will be considered to operate through a permanent establishment abroad when, for any reason, it has outside Spanish territory, on a continuous or habitual basis, facilities or workplaces in which it carries out all or part of its activity, or acts therein through an agent authorized to contract on behalf of and on account of the taxpayer, who habitually exercises said powers. In particular, permanent establishments are understood to be those referred to in letter a) of section 1 of article 13 of the Non-Resident Income Tax Law. If the permanent establishment is located in a country with which Spain has signed an agreement to avoid international double taxation, which is applicable to it, the resulting tax will apply.

Likewise, Article 22.4 of the LIS establishes that a taxpayer will be considered to operate through different permanent establishments in a given country, when they carry out clearly distinguishable activities and the management of these is carried out separately.

Finally, according to the provisions of article 22.5 of the LIS, the income of a permanent establishment will be considered to be that which it could have obtained if it were a separate and independent entity, taking into account the functions performed, the assets used and the risks assumed by the entity through the permanent establishment.

For these purposes, estimated income from internal operations with the entity itself will be taken into account in those cases where this is established in an international double taxation avoidance agreement that is applicable.

Article 22.6 of the LIS establishes that the regime provided for in said article will not apply when, with respect to income obtained abroad, the circumstances provided for in article 21.9 of the LIS occur. The option referred to in letter c) of said section will be exercised for each permanent establishment outside of Spanish territory, even if there are multiple permanent establishments in the territory of a single country.