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Practical Handbook for Companies 2021

Reinvestment of excess profits

The paragraph 6 of the twenty-fourth transitory provision of the LIS establishes that income qualifying for the reinvestment of extraordinary profits provided for in article 21 of Law 43/1995, of 27 December, on Corporate Income Tax, as in force until 1 January 2002, which had not applied the deduction established in article 36 ter of Law 43/1995 by application of paragraph two of the third transitory provision of Law 24/2001, of 27 December, on Tax, Administrative and Social Order Measures, will be regulated by the provisions of said article 21 and its implementing regulations (Chapter VII of Title I of the Corporate Income Tax Regulations, approved by Royal Decree 537/1997, of 14 April).

With effect for tax periods beginning on or after 1 January 2002, Article 21 of Law 43/1995 of 27 December 1995 on corporation tax was repealed by Law 24/2001 of 27 December 2001 on fiscal, administrative and social measures.

However, by virtue of the provisions of the aforementioned twenty-fourth transitional provision of the LIS, Article 21 of Law 43/1995 continues to apply after 1 January 2002 for those incomes that availed themselves of its provisions (and its implementing regulations) during its validity, and even if the reinvestment and other requirements occur in tax periods commencing after that date.

Given this transitional validity of article 21 of Law 43/1995, the main features of this reinvestment deferral benefit are set out below.The following content is valid as long as Article 21 of Law 43/1995 is applicable on a transitional basis.

In order to benefit from the deferral of income obtained in the transfer for valuable consideration of assets, these must belong to one of these groups:

  • Those belonging to tangible fixed assets.

  • Those belonging to intangible fixed assets.

  • The securities representing the participation in the capital or in the equity of all kinds of entities which grant a participation of no less than 5 percent of the share capital of the same and which have been held at least one year prior to the date of transfer, without including in this category of assets and liabilities the securities representing the participation in investment funds or those others which do not grant a participation in the share capital.For the purposes of calculating the time of possession, the securities transferred are deemed to have been the oldest.

The amount of the provisions relating to the assets or securities, insofar as the allocations to them have been deductible for tax purposes, and the amounts applicable to the freedom of depreciation to be included in the tax base on the transfer of the assets that benefited from it, shall not form part of the income qualifying for the benefit of.

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

The reinvestment shall be deemed to have been made on the date on which the assets and liabilities in which it is made are made available.In the case of assets that are subject to the contracts as referred to in section 1 of additional provision 57 of Act 26/1988, of 29 July, on discipline and intervention of the finance companies (financial leases), will be considered complete the reinvestment on the date of the contract is signed, for an amount equal to the cash value of the asset.The effects of the reinvestment are conditional on the exercise of the purchase option.

In the event that the reinvestment is not made within the aforementioned period , the part of the gross tax liability corresponding to the income obtained, in addition to late payment interest, shall be paid together with the tax liability for the tax period in which it expired or together with the tax liability for a previous tax period, at the taxpayer's choice.

The reinvestment of an amount lower than than the amount of the transfer entitles the taxpayer not to include in the tax base the part of the income corresponding proportionally to the amount reinvested.In this case, the portion of the tax liability corresponding to the income to be included in the gross tax base, in addition to interest on arrears shall be paid together with the tax liability corresponding to the tax period in which expired the period for making the reinvestment, or jointly with the amount corresponding to a previous tax period, to be decided by the taxpayer.

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

  1. For tax periods ending in the seven years following the end of the tax period in which the three-year period following the date of delivery or disposal of the asset or liability whose transfer gave rise to the excess profit expired.

    In this case, the income corresponding proportionally to the duration of the tax period in relation to the aforementioned seven years shall be included in the tax base of each tax period.

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

    In this case, the income corresponding proportionally to the depreciation value of the assets in relation to their acquisition price or production cost shall be included in the tax base for each tax period.

The value of the amortisation will be the amount that should be considered tax deductible, and may not be less than the amount resulting from applying the linear coefficient derived from the maximum amortisation period established in the officially approved amortisation tables.

In the case of assets which are the object of the financial leasing contracts referred to in section 1 of the seventh additional provision of Law 26/1988, of 29 July, on the Discipline and Intervention of Credit Institutions, the amounts which would have been tax deductible in accordance with the provisions of section 6 of article 128 of Law 43/1995 will be taken.

In the event of transfer of the asset before its full depreciation the depreciation value shall be taken to be the amount still to be depreciated at the time of the transfer.

Where the asset item to be reinvested is a building, the part of the value attributable to the land shall be allocated according to the method set out in (a) above.When not know the value attributed to the land, this value will be calculated distributing the acquisition price between the assessed values of the ground and of the building in the year of acquisition.However, the taxpayer can use a cash distribution of the cost price different, when it proves that this criterion is based on the fair market value of the ground and of the building in the year of acquisition.

The choice of any of the methods of incorporation into the tax base of the income not included in the tax base by application of the reinvestment of extraordinary profits must be made in the first tax period in which the incorporation of the income takes place, and must be declared together with the tax return corresponding to that tax period.Once completed, the choice, cannot be changed.If it cannot be choice will apply the method set out in letter a) above.

In no case may be classed income without the integrated into the taxable base must be done this integration in accordance with the method that applicable.

The assets which are the object of the reinvestment must remain in the taxpayer's assets, unless there is a justified loss, until the aforementioned period of seven years has elapsed, unless their useful life in accordance with the depreciation method permitted under Article 11.1 of the Tax Law, which is applied, is shorter.The transfer of these items before the end of the aforementioned period will determine the integration in the gross tax base for the tax period in which transmission occurs, of the portion of the income pending integration, except if the amount obtained is subject to reinvestment in the terms that are exposing.In this case, the part of the income pending integration must be included in the gross tax base in accordance with the method that the taxpayer chose.When this method have been the established in letter b) above, in both you perform the new reinvestment, will be incorporated into the gross tax base will be the result of applying to the amount of the income registered in the reinvestment of excess profits the Maximum linear coefficient of depreciation according to officially approved depreciation tables that correspond to the transferred asset is financed.The same criterion of integration will continue to apply in the event that the reinvestment is reinvested in assets not/depreciable.In the case of depreciable/amortisable, the income pending will be integrated in the tax periods in which previsions assets in which occurred materialised this reinvestment.

Once the period of seven years referred to in a) above has passed, or the useful life if shorter, the transfer of the assets in which the reinvestment was made will determine that the income pending integration at that time will be included in the tax base of the tax periods ending after the said transfer, in the amount resulting from applying in each of them the maximum linear depreciation coefficient corresponding to the transferred asset to the amount of the income obtained from the reinvestment of extraordinary profits, or to the part of that amount that corresponds proportionally, when the duration of the tax period is less than twelve months.

Filling in form 200

The box [00365] "Reinvestment of extraordinary profits (DT 24ª LIS)" on page 13 of form 200, shall 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 Income Tax.