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Practical guide to 2020 Income Tax.

B) Requirements for applying the deduction

Regulations: Article 27, paragraphs 3 to 14 and transitional provision eight of Act 19/1994, of 6 July, amending the Canary Islands Economic and Tax Regime

The following requirements must be met for the application of this deduction:

  • That the taxpayer determines the net returns of their economic activity according to the direct estimation method and that these incomes come from activities carried out through establishments located in the Canary Islands.
  • The Investment Reserve is accounted for separately, and that it is not available as long as the assets in which it has materialized must remain in the company.
  • That the amounts allocated to this reserve are accrued within the maximum period of three years, counted from the accrual date of the tax corresponding to the financial year in which it was allocated, except for allowances with profits obtained in tax periods beginning in 2016, which is extended by one more year (to four years).

    New: Due to the serious effects that the pandemic has had on the realisation of investments and economic results in 2020, Royal Decree-Law 39/2020, of 29 December, on financial measures to support society and the economy and to comply with the execution of judgments, introduces a new transitional provision eight in Act 19/1994, of 6 July, amending the Canary Islands Economic and Tax Regime, to extend this period, which establishes article 27,4 of Law 19/1994, in another year for investments in the Canary Islands, with profits obtained in tax periods beginning in 2016.

  • That this materialization is carried out in the execution of one of the investments detailed in article 27,4 of Act 19/1994 (Official State Gazette of 30).

    The investments detailed in article 27,4 of Law 19/1994 are examined in its specific section "Investments where the amounts used for the IRC" of this Chapter must materialize

  • That the capital elements in which the investment is carried out are located or received in the Canary Islands, which are used in the same, which are affected and necessary for the performance of the taxpayer's economic activities, except in the case of those that contribute to the improvement and protection of the Canary Islands environment. Investments detailed in article 27,4 of Act 19/1994.

    Article 27,5 of Act 19/1994 determines for this purpose which elements will be considered to be located and used in the archipelago.

  • That the assets in which the reserve for investments related to articles A and C of article 27,4 of the Act has materialized 29/1994, as well as those acquired under the provisions of point D of paragraph 4 of Article 27, remain in operation in the same taxpayer's company for at least five years , without being the subject of transfer, lease or transfer to third parties for use. When its permanence is less than that period, this requirement shall not be considered breached when another equity element is acquired that replace by its net book value, before or within 6 months from its derecognition in the balance sheet that meets the requirements for the application of the deduction and that it remains in operation for the time necessary to complete this period. In the case of land acquisition, the term will be ten years.

    Taxpayers engaged in economic activity of leasing or transfer to third parties for the use of fixed assets may enjoy the investment reserve , provided that there is no direct or indirect connection with the tenants or assigns of these assets, under the terms defined in article 18,2 of Act 27/2014, of 27 November, on Corporation Tax, or in the case of financial leasing operations.

    In the case of leasing of real estate, in addition to the conditions set out in the previous paragraph, the requirements established in the fourth paragraph of article 8 of article 27 of the aforementioned Act 19/1994 of 6 July must be met

    For the purposes of calculating the maintenance period, it should be taken into account that, for the investments of article 27,4. A) and C), the occurrence shall be understood to have occurred, even in the case of acquisition by financial lease, at the time the assets come into operation.

Note: The article in the Official Journal of the Royal Decree-Law 15/2014, of 19 December, amending the Canary Islands Economic and Tax Regime (Official State Gazette of 20) repealed section 10 of article 27 of Act 19/1994, which is why it is not necessary for the taxpayer to present the investment plan online within the tax return periods in which the deduction corresponding to the Canary Islands investment reserve and through the form on the Tax Agency website

Non-compliance with requirements

Regulations: Article 27,16 of Act 19/1994, of 6 July, amending the Canary Islands Economic and Tax Regime

The availability of the investment reserve before the end of the investment maintenance period or for investments other than those provided for in section 4 of this article, as well as failure to comply with any other of the requirements set out in this article, except for the requirement of its accounting separate from the information on the IRC, the annual financial statements must be reported, and the taxpayer must integration, in the taxable income base of the year in which these circumstances occur, of the amounts that in their day led to the reduction of the reduction or deduction of the reduction, without prejudice to any sanctions that may be imposed.

In the event of non-compliance with the obligation to exercise the purchase option provided for in the financial lease contracts, the integration into the taxable base will take place in the year in which it is contractually planned that it should have been exercised.

Late payment interest will be settled in the terms set out in Law 58/2003 and its implementing regulations