Reinvestment of excess profits

Section 6 of the twenty-fourth transitional provision of the LIS establishes that the income subject to the reinvestment of extraordinary profits provided for in article 21 of Law 43/1995, of December 27, on Corporation Tax, as amended until January 1, 2002, which has not applied the deduction established in article 36 ter of Law 43/1995 by application of section two of the third transitional provision of Law 24/2001, of December 27, on Fiscal, Administrative and Social Order Measures, shall be regulated by the provisions of the aforementioned article 21 and its implementing regulations (Chapter VII of Title I of the Corporation Tax Regulations, approved by Royal Decree 537/1997, of April 14).

With effect for tax periods beginning on or after 1 January 2002, Article 21 of Law 43/1995 of 27 December on Corporate Income Tax was repealed by Law 24/2001 of 27 December on Fiscal, Administrative and Social Order Measures.

However, and pursuant to the provisions of the aforementioned twenty-fourth transitional provision of the LIS, article 21 of Law 43/1995 continues to be applicable after January 1, 2002 for those incomes that were subject to the provisions of the same (and its implementing regulations) during its validity, and even when the reinvestment and other requirements occur in tax periods beginning on or after that date.

Given this temporary validity of article 21 of Law 43/1995 , the main characteristics of this deferral benefit for reinvestment are listed below. The content detailed below will be valid as long as said article 21 of Law 43/1995 is temporarily applicable.

To qualify for the deferral of income obtained from the onerous transfer of assets , they must belong to one of these groups:

• Those belonging to tangible fixed assets .

• Those belonging to intangible fixed assets .

• Securities representing participation in the capital or equity of all types of entities that grant a stake no less than percent the share capital thereof and that have been held at least one year prior to the date of transfer, without securities representing participation in investment funds or other securities that do not grant stake in the share capital being included in this category of assets. For the purposes of calculating the period of possession, the values transferred are understood to have been the oldest.

## The amount of the provisions relating to assets or securities, insofar as the allocations to them would have been tax deductible, or the amounts applicable to the freedom of amortization that must be included in the tax base on the occasion of the transfer of the assets that enjoyed the same, will not form part of the income eligible for benefit ##1##.

The condition for the application of the reinvestment of extraordinary profits is that the amount of the aforementioned transfers is reinvested in any of the assets listed above, within the period between the year prior to the date of delivery or availability of the transferred assets and the three years thereafter and, exceptionally, in accordance with a special reinvestment plan approved by the tax authorities.

The reinvestment will be deemed to have taken place on date on which the assets in which it is materialized are made available. In the case of assets that are the subject of the contracts referred to in section 1 of the Seventh Additional Provision of Law 26/1988, of July 29, on Discipline and Intervention of Credit Institutions (financial leasing contracts), the reinvestment will be considered to have been made on the date of the contract, for an amount equal to the cash value of the asset. The effects of the reinvestment are subject, in a resolutory manner, to the exercise of the purchase option.

In the event that the reinvestment is not made within the period indicated above, the portion of the full quota corresponding to the income obtained, in addition to the late payment interest, will be paid together with the corresponding quota for the tax period in which it expired or together with the quota corresponding to a previous tax period, at the taxpayer's choice.

The reinvestment of an amount less than the amount of the transfer gives the right to not include in the tax base the part of income that proportionally corresponds to the reinvested amount. In this case, the portion of the full amount corresponding to the income that must be included in the tax base, in addition to late payment interest, will be paid together with the amount corresponding to the tax period in which the deadline for making the reinvestment expired, or together with the amount corresponding to a previous tax period, at the taxpayer's discretion.

The amount of income not included in the tax base must be incorporated into it by one of the following methods, at the taxpayer's choice:

1. In tax periods that end in the seven years following the close of the tax period in which the three-year period following the date of delivery or disposal of the asset whose transfer gave rise to the extraordinary benefit expired.

   In this case, the income that proportionally corresponds to the duration of the same in relation to the aforementioned seven years will be integrated into the taxable base of each tax period.

2. In the tax periods in which the assets are amortized in which the reinvestment is made, in the case of amortizable assets.

   In this case, the income that proportionally corresponds to the value of the amortization of the assets in relation to their acquisition price or production cost will be integrated into the tax base of each tax period.

The value of the amortization will be the amount that must be considered tax deductible, and cannot be less than the result of applying the linear coefficient derived from the maximum amortization period established in the officially approved amortization tables.

In the case of assets that are the subject of the financial leasing contracts referred to in section 1 of the Seventh Additional Provision of Law 26/1988, of July 29, on Discipline and Intervention of Credit Institutions, the amounts that have been tax deductible in accordance with the provisions of section 6 of article 128 of Law 43/1995 shall be taken.

In the event of transfer of the asset before its full amortization the amortization value shall be understood as the amount pending amortization at the time of the transfer.

When the asset subject to reinvestment is a building , the portion of value attributable to the land must be allocated to the method provided for in letter a) above. When the value attributed to the land is not known, said value will be calculated by prorating the acquisition price between the cadastral values of the land and the construction in the year of acquisition. However, the taxpayer may use a different criterion for distributing the purchase price, when it is proven that said criterion is based on the normal market value of the land and the construction in the year of acquisition.

The choice of any of the methods of incorporation into the tax base of the income not included in it by applying the reinvestment of extraordinary profits must be made in the first tax period in which the income is to be incorporated, and must be declared together with the declaration corresponding to said tax period. Once the choice has been made, it cannot be changed. If the election is not held, the method provided for in letter a) above will be applied.

In no case may income remain unaccounted for in the tax base, and such integration must be carried out in accordance with the applicable method.

The assets subject to reinvestment must remain in the assets of taxpayer , except for justified loss, until the seven-year period mentioned above is met, unless their useful life according to the amortization method admitted in section 1 of article 11 of the Tax Law, which is applied, is less. The transfer of said elements before the end of the aforementioned period will determine the integration into the tax base, of the tax period in which the transfer occurs, of the portion of income pending integration, except if the amount obtained is subject to reinvestment in the terms that are being set out. In this case, the portion of income pending integration must be integrated into the tax base according to the method chosen by the taxpayer. When said method has been the one established in letter b) above, as long as the new reinvestment is not made, the result of applying to the amount of income subject to the reinvestment of extraordinary profits the maximum linear amortization coefficient according to officially approved amortization tables that corresponded to the transferred element will be integrated into the tax base. The same integration criteria will continue to apply in the event that the reinvestment materializes in non-amortizable elements. In the case of amortizable elements, the pending income will be integrated into the tax periods in which the assets in which this reinvestment has been made are amortized.

the seven year period referred to in letter a above has passed, or the useful life if it is shorter, the transfer of the assets in which reinvestment took place will determine that the income pending integration at that time is integrated into the tax base of the tax periods that end after said transfer, in the amount resulting from applying in each of them the maximum linear amortization coefficient that corresponded to the transferred element to the amount of income obtained from the reinvestment of extraordinary profits, or to the part of that amount that proportionally corresponds, when the duration of the tax period is less than twelve months.

Filling in form 200

Box [00365] "Reinvestment of extraordinary profits ( DT 24 LIS)" on page 13 of form 200 will be used to include in the tax base for the period the corresponding part of those incomes whose taxation had been deferred at the time by application of the provisions of the now repealed article 21 of Law 43/1995, on Corporate Tax.