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Practical Manual for Companies 2023.

Exemption of foreign income

Article 22 of the LIS regulates the exemption of certain income obtained abroad through a permanent establishment.

A. Completion of form 200

In application of the provisions of said article, the taxpayer must make the following adjustments in boxes [00256] and [00278] "Exemption of income abroad (art. 22 LIS)" on page 13 of form 200:

  • Article 22.1 of the LIS establishes the exemption of positive income obtained abroad through a permanent establishment located outside of Spanish territory, as well as those derived from the transfer of a permanent establishment or the cessation of its activity, when the permanent establishment has been subject to and not exempt from a tax of an identical or analogous nature to this Tax with a nominal rate of at least 10 percent, in the terms provided for in article 21.1 of said Law.

    Consequently, when the entity obtains these positive exempt incomes by application of the provisions of article 22.1 of the LIS, it must include the amount of the same in box [00278] of decrease in accounting results.

  • Article 22.2 of the LIS already established that negative income obtained abroad through a permanent establishment will be included in the tax base, but for tax periods beginning on or after January 1 2017, it establishes that negative income derived from the transfer of the permanent establishment will not be included in the tax base either.

    Therefore, based on the provisions of this article, the entity must include in box [00256] of increases, the amount corresponding to said negative income.

    However, article 22.2 of the LIS establishes in its last paragraph that tax deductible. In this case, the amount of the negative income will be reduced by the amount of net positive income acquired previously, and which was subject to the application of an exemption or deduction regime to avoid double taxation, for the amount thereof.

    Accordingly, the entity must include this amount in box [00256] of increases.

Explanatory notes regarding articles 22.1 and 22.2 of the LIS:

Article 22.3 of the LIS establishes that an entity will be considered to operate through a permanent establishment abroad when, for any reason, it has, outside of Spanish territory, on a continuous or habitual basis, facilities or workplaces in which it carries out all or part of its activity, or acts therein through an agent authorized to contract on behalf of and on account of the taxpayer, who habitually exercises such powers. In particular, permanent establishments are understood to be those referred to in letter a) of section 1 of article 13 of the Non-Resident Income Tax Law. If the permanent establishment is located in a country with which Spain has signed an agreement to avoid international double taxation, which is applicable to it, the resulting tax will apply.

Likewise, article 22.4 of the LIS establishes that a taxpayer will be considered to operate through different permanent establishments in a given country, when they carry out clearly distinguishable activities and the management of these is carried out separately.

Finally, according to the provisions of article 22.5 of the LIS , the income of a permanent establishment will be considered those that it could have obtained if it were a separate and independent entity, taking into account the functions developed, the assets used and the risks assumed by the entity through the permanent establishment.

For these purposes, estimated income from internal operations with the entity itself will be taken into account in those cases where this is established in an international double taxation avoidance agreement that is applicable.

Article 22.6 of the LIS establishes that the regime provided for in said article will not apply when, with respect to income obtained abroad, the circumstances provided for in Article 21.9 of the LIS occur. The option referred to in letter c) of article 21.9 of the LIS will be exercised by each permanent establishment outside Spanish territory, even in the case where there are several in the territory of a single country.

B. Transitional regime ( DT 16.4 and 16.5 of the LIS)

In relation to the regime regulated in article 22.1 and 2 of the LIS, it is necessary to take into account the transitional regime provided for in section 4 of the sixteenth transitional provision of the LIS according to which, in the event that a permanent establishment had obtained net negative income that had been integrated into the tax base of the entity in tax periods beginning before January 1, 2013, the exemption provided for in article 22 of the LIS or the deduction referred to in article 31 of this Law will only apply to positive income obtained subsequently from the moment in which it exceeds the amount of said negative income.

Likewise, section of the sixteenth transitional provision of the LIS establishes another transitional regime for cases of transfer of a permanent establishment in tax periods beginning on or after January 2016, according to which the taxable base of the transferring entity resident in Spanish territory will be increased by the amount of the excess of the net income generated by the establishment in tax periods beginning before January 1 over the net positive income generated by the permanent establishment in tax periods beginning on or after date with the limit of the positive income derived from the transfer thereof.

Income obtained abroad through a permanent establishment (EP) (art. 22 LIS)
Origin of incomeTax Periods
prior to 1/1/2017
Tax Periods
after 1/1/2017
Obtained through EPPositive incomes Exempt Exempt
Negative income They do NOT integrate into BI They are NOT integrated into BI
EP Transmission DerivativesPositive incomes Exempt Exempt
Negative income YES they are integrated into BI
If the acquirer is a group entity,
there is a deferral regime
(art. 11.11 LIS)
They are NOT integrated into BI
The deferral regime of
art. 11.11 LIS is repealed
EP cessation derivativesPositive incomes Exempt
(although not expressly indicated)
Exempt
Negative income YES they are integrated into BI YES they are integrated into BI

Notes to the table:

Exempt income if EP subject and not exempt from a tax similar to Corporate Tax with a nominal rate >10%.

Negative income that is integrated into BI is reduced in accordance with art. 22. LIS.