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Practical Income Manual 2021.

Practical case

Marriage formed by Don LCA and Mrs. DZH, 76 and 75 years old, respectively, married in common law.

During the year 2021, the following events with fiscal significance took place:

  • On May 2, 2006, they subscribed to 100 convertible debentures issued for 14 years from Company “PS” for a nominal amount equivalent to 6,000 euros, plus the equivalent of 60 euros in commissions and expenses. .

    The agreed interest rate is 7.5 percent, payable annually during the month of May, with a conversion premium also provided, consisting of a 20 percent reduction on the stock market price of the shares of the Company “PS ” on the day of conversion.

    On May 2, 2021, the obligations were converted into shares, receiving 500 shares of 6 euros, which were valued for these purposes at 200%. The average change in the stock market session that day was 250 percent.

  • In 1997 they acquired some shares of “TPS” , for whose financing they requested a bank loan. In March 2021, they received dividends from said company for a full amount of 1,502 euros, paying the amount of 90 euros as administration and deposit expenses of these values.

  • On December 31, 2021 TZ Bank informs you that, during said year, it has paid 37 euros into your checking account, as interest produced by the current account. There is a withholding of 7.03 euros on said interest paid in May.

  • On July 10, 2007, they subscribed for a full amount of 40,000 euros securities issued by the "ZZ" bank that were in the nature of preferred shares in accordance with Law 13/1985. On October 15, 2021, these securities were converted into obligations of the bank itself for a nominal amount equivalent to 38,100 euros, with the bank being responsible for the commissions and expenses inherent to the operation.

    On November 25, 2021, the debentures were exchanged for 5,000 euros in shares of the "ZZ" bank. The market value of the shares received at the time of the exchange was 8.10 euros/share.

  • Since Don LCA He left his direct operation when he retired, the couple has leased a cafeteria establishment , owned by both of them. The rental fee during 2021 was 1,300 euros per month, with the tenant having made the corresponding withholding on account when making each of the payments. The lease of the cafeteria includes both the premises and all the facilities and furniture, with the tenant being responsible for replacing the kitchenware, crockery and table linen, as well as purchases and current expenses incurred by the ordinary operation of the business.

    The effective depreciation of the premises, acquired in 1988 and since then used for the cafeteria business that the couple now rents, is estimated at an amount of 900 euros during the year 2021.

    The furniture was acquired on December 31, 2014 for an amount of 15,000 euros, being fiscally admissible in 2021 to carry out a 10% depreciation.

    The expenses paid by the couple in relation to the cafeteria during fiscal year 2021 show the following amounts:

    • 1,100 euros, for a repair of the air conditioning installation.
    • 800 euros, from the receipt of the Real Estate Tax (Urban).
    • 360 euros, for administration expenses.

Don LCA and Mrs. DZH They choose to file a joint return in Personal Income Tax .

Determine the net return on movable capital to be integrated into the general tax base and the savings tax base.

Solution:

Previous note: Since this is a marriage under community property and all income comes from assets owned jointly by both spouses, the income will correspond half to each of them. Therefore, in the event that they had chosen to file individual returns, each one would include in their return half of the taxable income and half of the tax-deductible expenses determined below.

However, having chosen to declare jointly, they must accumulate all the income and expenses produced.

A. Income from movable capital to be included in the savings tax base

1. Income from the convertible bonds of the company “PS”:

The profitability obtained in 2021 is made up of two parts: interest (explicit part) and conversion premium (implicit part). Therefore, “PS” obligations constitute a financial asset with mixed performance.

a. May 2021 coupon:

  • Full income (7.5% s/6,000) = 450.00
  • Withholdings (19% s/450) (*) = 85.50

(*) The withholding rate applicable in 2021 is 19%. Withholdings on capital gains must be included in box [0597] on page 21 of the declaration. (Back)

b. Conversion:

  • Stock market value of shares received (500 x 6 x 250/100) = 7,500.00
  • less: Cost of delivered obligations (6,000 + 60 expenses) = 6,060.00
  • Full income (7,500 – 6,060) = 1,440.00
  • Withholdings (Not subject to withholding)

2. “TPS” stock dividends:

  • Full income = 1,502.00
  • Withholdings (19% s/1,502) (*) = 285.38

(*)  The withholding rate applicable in 2021 is 19 percent. Withholdings on capital gains must be included in box [0597] of the declaration. (Back)

3. Current account interest at TZ bank:

  • Full income = 37.00
  • Retention (19% s/37) (*) = 7.03

(*)  The withholding rate applicable in 2021 is 19 percent. Withholdings on capital gains must be included in box [0597] of the declaration. (Back).

4. Preferred shares or other securities received in replacement of these:

a. Conversion of preferred shares into obligations:

  • Conversion value = 38,100.00
  • less: acquisition value of preferred shares = 40,000.00
  • Negative returns (38,100 – 40,000) = –1,900.00

b. Exchange of debentures into shares:

  • Stock market value of shares received (5,000 x 8.10) = 40,500.00
  • less Cost of delivered obligations = 38,100.00
  • Positive returns (40,500 – 38,100) = 2,400.00
  • Withholdings (Not subject to withholding)
  • Total to compute (2,400 -1,900) = 500.00

Determination of the total net return to be integrated into the savings tax base

  • Total full income [450 + 1,440 + 1,502 + 37 + 500] = 3,929.00
  • Tax deductible expenses (administration and deposit expenses of TPS shares) = 90.00
  • Net return (3,929 - 90) = 3,839.00
  • Total withholdings supported (85.50 + 285.38 + 7.03) (*) = 377.91

(*) The withholding rate applicable in 2021 is 19 percent. Withholdings on capital gains must be included in box [0597] of the declaration. (Back)

B. Income from movable capital to be integrated into the general tax base (lease of the cafeteria)

This is the lease of a business in operation, in which, together with the premises, the facilities, furniture, clientele, etc. are transferred. Consequently, the return on capital obtained must be integrated into the general tax base.

The determination of the net performance is carried out according to the following detail:

a. Full income:

  • Rental fee (1,300 x 12 months) = 15,600.00

b. Deductible expenses:

  • IBI receipt = 800.00
  • Air conditioning repair = 1,100.00
  • Administration fees = 360.00
  • Local amortization = 900.00
  • Furniture amortization (10% s/ 15,000) = 1,500.00
  • Total = 4,660.00

c. Net return (15,600 - 4,660) = 10,940.00

d. Reduction= 0

e. Reduced net return = 10,940.00

f. Withholdings supported (19% s/15,600) (*) = 2,964.00

(*)  The withholding rate applicable in 2021 is 19 percent. Withholdings on capital gains must be included in box [0597] of the declaration. (Back)