4.3.2.2 Requirements

These taxpayers will be entitled to a reduction in the tax base of 10 percent of the amount of the increase in their equity, provided they meet the following requirements:

• That the amount of the increase in the entity's shareholders' equity remains steady for a period of 5 years from the end of the tax period to which the reduction corresponds, unless there are accounting losses in the entity.

  The amount of such increase will be determined by the positive difference between the existing equity at the end of the financial year, excluding the results of the same, and the existing equity at the beginning of the same, excluding the results of the previous financial year, and without taking into account certain concepts.

  However, for the purposes of determining this increase, the following will not be considered equity at the start and the end of the taxable period:

  • Contributions by partners.

  • Increases in capital or equities due to offsetting of credits.

  • Increases in equity through operations with own shares or restructuring.

  • Legal or statutory reserves.

  • The unavailable reserves that are created by applying the provisions of article 105 of this Law and article 27 of Law 19/1994, of July 6, amending the Economic and Fiscal Regime of the Canary Islands.

  • Equity corresponding to an issue of compound financial instruments.

  • Equity that corresponds to changes in deferred tax assets resulting from a decrease or increase in the tax rate for this tax.

  These items will not be taken into account when determining the maintenance of the increase in equity in each tax period in which it is required. The capitalization reserve provided will be taken into account for the purposes of determining the increase in equity and the maintenance of such increase, in accordance with the provisions of article 25.2 of the LIS . Therefore, the capitalisation reserve provided will form part of the equity existing at the beginning and end of the financial year in the same way as the rest of the items comprising such funds that are not excluded for the purposes of determining their increase and subsequent maintenance.

• That a reserve be set aside for the amount of the reduction, which must appear on the balance sheet with absolute separation and appropriate title and will be unavailable during the period specified in the previous paragraph.

  For these purposes, it shall not be deemed that the aforementioned reserve has been used in the following cases:

  • When a partner or stockholder exercises his right to separate from the company.

  • When the reserve is eliminated, totally or partially, as a result of operations to which the special tax regime established in Chapter VII of Title VII of the LIS is applicable.

  • When the entity must apply the aforementioned reserve by virtue of a legal obligation.