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Practical Handbook for Companies 2021

General aspects of increased limits.Examples

The increased limits of Article 94(1).b) of Law 20/1991 shall be applied on the gross tax liability less deductions to avoid international double taxation and allowances (box [00582] "Positive adjusted gross tax liability" on page 14 of Form 200).

In relation to these increased limits, account should be taken of the provisions of article 39 of the LIS which establishes that the amount of the deductions applied in the tax period, together may not exceed 25 per cent of the gross tax liability less deductions for the avoidance of double international taxation and allowances.However, the limit will be raised to 50 per cent when the amount of the deduction provided for in Article 35 of the LIS, which corresponds to expenses and investments made in the tax period itself, exceeds 10 per cent of the gross tax payable, less deductions to avoid international double taxation and allowances.

Therefore:

  1. If we apply to the general limit of 25 per cent the provisions of Article 94.1.b) of Law 20/1991, according to which the limits will always be 80 per cent higher than the limit for each modification of the deduction for investments set in the general regime with a minimum differential of 35 percentage points, the limit of 25 per cent will be increased to 60 per cent, since according to the following calculations it is the higher of:

    • 25 % x 1,8 = 45%
    • 25% + 35% = 60%.

    With effect for tax periods beginning on or after 7 November 2018, for the islands of La Palma, La Gomera and El Hierro, if we apply to the general limit of 25 per cent the provisions of Article 94.1.b) Law 20/1991 which establishes that the minimum limit of 80 per cent will be increased to 100 per cent and the minimum differential will increase to 45 percentage points, provided that the Community regulations on state aid so permit and the investments are covered by Law 2/2016 of 27 September and other laws on measures for the organisation of the economic activity of these islands, the limit of 25 per cent will be increased to 70 per cent, since, according to the following calculations, it is the higher of:

    • 25 % x 2 = 50%
    • 25% + 45% = 70%.
  2. If we apply to the 50 percent limit the provisions of article 94.1.b) of Law 20/1991, this limit will be increased to 90 percent, since according to the following calculations it is the higher of:

    • 50 % x 1.8 = 90%.
    • 50 % + 35 % = 85%

    With effect for tax periods beginning on or after 7 November 2018, for the islands of La Palma, La Gomera and El Hierro, if we apply to the general limit of 50 percent the provisions of Article 94.1.b) of Law 20/1991 which establishes that the minimum limit of 80 percent will be increased to 100 percent and the minimum differential will increase to 45 percentage points, when the Community regulations on state aid so permit and the investments referred to in Law 2/2016, of 27 September and other laws on measures for the organisation of economic activity in these islands, the limit of 50 percent will be increased to 100 percent, since, according to the following calculations, it is the greater of:

    • 50 % x 2 = 100
    • 50 % + 45 % = 95%
  3. In relation to the improvement of the limits provided for in article 94.1.b) of Law 20/1991 for the islands of La Palma, La Gomera and El Hierro, following the modification made for tax periods starting on or after 7 November 2018 by Law 8/2018 of 5 November, in order to apply the increased percentages of the maximum limit on the positive adjusted gross tax liability in these smaller islands, the taxpayer must have his tax domicile or a permanent establishment on these islands, and the investment must be located and used on these islands.

    Regarding the application of the limits, in those cases in which the taxpayer generates deductions in the aforementioned smaller islands and in the rest of the Canary Islands, must comply simultaneously with the following criteria:

    1. Deductions generated on the three islands mentioned above will have to respect their own improved limit.Likewise, deductions generated in the rest of the Canary Islands must also respect their own improved limit.

    2. In the event that deductions exist both on the three islands mentioned above and on the rest of the Canary Islands, the maximum limit for both types of deductions will be the higher limit, i.e. the improved limit of the three islands.

    3. In the event that deductions concur in the three islands mentioned above and in the rest of the Canary Islands, the latter cannot benefit from the increased limit of the three islands.

Practical examples

Below is a series of examples that show more graphically how the increased limits are applied in cases where the taxpayer generates deductions for investments on the islands of La Palma, La Gomera and El Hierro, as well as in the rest of the Canary Islands archipelago.

Example 1

Company "A", with tax domicile in the Canary Islands, has made investments in 2021 in different islands of the Canary Islands, for which it has generated the following deductions:

Deductions generated in 2021:

  • Deduction for investments in Tenerife:5,000 euros
  • Deduction for investments in La Palma:9,000 euros

N.B.:We assume that no R&D&I expenses have been incurred in the generation of these deductions.

This company has an adjusted gross tax liability (box [00582] on page 14 of Form 200) of 10,000 euros.

  • Increased limit in Tenerife (60%):10,000 x 0.6 = 6,000 euros
  • Enhanced increased limit on La Palma (70%):10,000 x 0.7 = 7,000 euros
  • Ceiling to be applied to the IC:Enhanced increased limit:10,000 x 0.7 = 7,000 euros

Deductions to be applied in 2021:

  • Deduction for investments in La Palma:7,000 euros
  • Deduction for investments in Tenerife:0 euros

Although the taxpayer can choose how to apply this deduction for investments in the Canary Islands, making numerous combinations and always respecting the established increased limits, in this case, the most advantageous option for company "A" is to first apply the deduction for investments made in La Palma, respecting the maximum limit of 70% to be applied to the total tax liability.In this way, company "A" will deduct in 2021, 7,000 euros of the 9,000 euros invested in La Palma, and will not be able to deduct any of the amount invested in Tenerife.

Deductions to be applied in future years:

  • Deduction for investments in Tenerife:5,000 euros
  • Deduction for investments in La Palma:2,000 euros

Example 2

Company B, with tax domicile in the Canary Islands, has made investments in 2021 in different islands of the Canary Islands, for which it has generated the following deductions:

Deductions generated in 2021:

  • Deduction for investments in Tenerife:5,000 euros
  • Deduction for investments in La Palma: 6.000 euros

N.B.:We assume that no R&D&I expenses have been incurred in the generation of these deductions.

This company has an adjusted gross tax liability (box [00582] on page 14 of Form 200) of 10,000 euros.

  • Increased limit in Tenerife (60%):10,000 x 0.6 = 6,000 euros
  • Enhanced increased limit on La Palma (70%):10,000 x 0.7 = 7,000 euros
  • Ceiling to be applied to the IC:Enhanced increased limit:10,000 x 0.7 = 7,000 euros

Deductions to be applied in 2021:

  • Deduction for investments in La Palma: 6.000 euros
  • Deduction for investments in Tenerife:1,000 euros

Although the taxpayer can choose how to apply this deduction for investments in the Canary Islands, making numerous combinations and always respecting the established increased limits, in this case, the most advantageous option for company "B" is to first apply the deduction for investments made in La Palma, being able to deduct the total amount invested of 6,000 euros.In addition, as the maximum deduction limit for investments is 7,000 euros, company "B" can also deduct the amount of 1,000 euros corresponding to the investment made in Tenerife.

Deductions to be applied in future years:

  • Deduction for investments in La Palma:0 euros
  • Deduction for investments in Tenerife:4,000 euros

Example 3

Company "C", with tax domicile in the Canary Islands, has made investments in 2021 in different islands of the Canary Islands, for which it has generated the following deductions:

Deductions generated in 2021:

  • Deduction for investments in Tenerife:9,000 euros
  • Deduction for investments in La Palma:500 euros

N.B.:We assume that no R&D&I expenses have been incurred in the generation of these deductions.

This company has an adjusted gross tax liability (box [00582] on page 14 of Form 200) of 10,000 euros.

  • Increased limit in Tenerife (60%):10,000 x 0.6 = 6,000 euros
  • Enhanced increased limit on La Palma (70%):10,000 x 0.7 = 7,000 euros
  • Ceiling to be applied to the IC:Enhanced increased limit:10,000 x 0.7 = 7,000 euros

Deductions to be applied in 2021:

  • Deduction for investments in La Palma:500 euros
  • Deduction for investments in Tenerife: 6.000 euros

Although the taxpayer can choose how to apply this deduction for investments in the Canary Islands, making numerous combinations and always respecting the established increased limits, in this case, the most advantageous option for company "C" is to first apply the deduction for investments made in La Palma, being able to deduct the total amount invested of 500 euros.Furthermore, company "C" can apply the deduction for investment in Tenerife, bearing in mind that, although the maximum limit to be applied to both deductions is the improved increased limit of 70% of the gross tax liability (7,000), the deductions made in the rest of the Canary Islands (in this case, Tenerife) cannot benefit from the improved increased limit of the three smaller islands (in this case, La Palma), so they will apply the unimproved increased limit of 60%.Thus, although the maximum limit to be applied is 7,000 euros, company "C" cannot deduct the amount of 6,500 euros for the investments made in Tenerife, as it exceeds its increased limit of 60% of the gross tax liability (6,000).

Deductions to be applied in future years:

  • Deduction for investments in La Palma:0 euros
  • Deduction for investments in Tenerife: 3.000 euros

Example 4

Company "D", with tax domicile in the Canary Islands, has incurred R&D expenses in 2021 in different islands of the Canary Islands, for which it has generated the following deductions for research and development activities under article 35 of the LIS:

Deductions generated in 2021:

  • Deduction for R&D activities in Tenerife:500 euros
  • Deduction for R&D activities on La Palma:400 euros

N.B.:We assume that company D has not generated any other deductions during the year.

This company has an adjusted gross tax liability (box [00582] on page 14 of Form 200) of 10,000 euros.

  • Calculation of the limits to be applied:10% 10,000 = 1,000 euros
  • Total amount of deductions on both islands:500 euros + 400 euros = 900 euros
  • 900 euros < 1.000 euros
  • Increased limit to be applied in Tenerife:60%
  • Increased limit to be applied in La Palma:70%

In this case, in order to determine the limits to be applied in each of the islands, the total R&D expenditure in the Canary Islands has been taken into account (without distinguishing the part corresponding to the three smaller islands from that of the rest of the Canary Islands).Thus, the limit to be applied in Tenerife will be 60%, which rises to 70% in La Palma, since the amount of the deduction for research and development activities (900 euros), which corresponds to expenses and investments made in the tax period itself, does not exceed 10% of the adjusted gross tax liability (1,000 euros).

Deductions to be applied in 2021:

  • Increased limit in Tenerife (60%):10,000 x 0.6 = 6,000 euros
  • Enhanced increased limit on La Palma (70%):10,000 x 0.7 = 7,000 euros
  • Ceiling to be applied to the IC:Enhanced increased limit:10,000 x 0.7 = 7,000 euros
  • Deduction for R&D activities in Tenerife:500 euros
  • Deduction for R&D activities on La Palma:400 euros

Although the taxpayer can apply this deduction for investments in the Canary Islands, making numerous combinations and always respecting the established increased limits, the option set out here is the most advantageous for applying the maximum deduction.

Deductions to be applied in future years:

There are no deductions to be applied in future years.

Example 5

Company "E", with tax domicile in the Canary Islands, has incurred R&D expenses in 2021 in different islands of the Canary Islands, for which it has generated the following deductions for research and development activities under article 35 of the LIS:

Deductions generated in 2021:

  • Deduction for R&D activities in Tenerife:9,500 euros
  • Deduction for R&D activities on La Palma: 12.000 euros

N.B.:We assume that company E has not generated any other deductions during the year.

This company has an adjusted gross tax liability (box [00582] on page 14 of Form 200) of 10,000 euros.

  • Calculation of the limits to be applied = 10% 10.000 = 1.000 Euros
  • Total amount of deductions on both islands:9,500 euros + 12,000 euros = 21,500 euros
  • 21,500 euros > 1,000 euros
  • Maximum limit to be applied in Tenerife:90%
  • Increased limit to be applied in La Palma:100%

In this case, in order to determine the limits to be applied in each of the islands, the total R&D expenditure in the Canary Islands has been taken into account (without distinguishing the part corresponding to the three smaller islands from that of the rest of the Canary Islands).Thus, the limit to be applied in Tenerife will be 90%, which rises to 100% in La Palma, since the amount of the deduction for research and development activities (21,500 euros), which corresponds to expenses and investments made in the tax period itself, exceeds 10% of the adjusted gross tax liability (1,000 euros).

Deductions to be applied in 2021:

  • Increased limit in Tenerife (90%):10,000 x 0.9 = 9,000 euros
  • Enhanced increased limit on La Palma (100%):10,000 x 0.10 = 10,000 euros
  • Ceiling to be applied to the IC:Enhanced increased limit:10.000 x 0,10 = 10.000
  • Deduction for R&D activities in Tenerie:0 euros
  • Deduction for R&D activities on La Palma:10,000 euros

Although the taxpayer can choose how to apply this deduction for investments in the Canary Islands, making numerous combinations and always respecting the established increased limits, the option set out here is the most advantageous.

Deductions to be applied in future years:

  • Deduction for R&D activities in Tenerife:9,500 euros
  • Deduction for R&D activities on La Palma:2,000 euros