7.4.6.3. Deductible expenses

To determine the net income, the following expenses will be deducted from the gross income:

1. All the expenses necessary to obtain the returns. The following, among others, will be considered necessary expenses for obtaining the returns:

   • The interest on third-party capital invested in the acquisition or improvement of the asset, right or faculty of use and enjoyment from which the income comes, and other financing costs, as well as the costs of repair and maintenance of the property.

     The amounts that due to the application of floor clauses have been paid by the taxpayer in 2017 and for which, before the end of the deadline for filing the declaration, an agreement is reached with the financial institution to return them or in compliance with court rulings or arbitration awards, will not be considered deductible expenses.

     The total amount to be deducted for these expenses may not exceed, for each asset or right, the amount of the gross income obtained. The excess can be deducted in the following four years.

   • Non-state taxes and surcharges, as well as state rates and surcharges, whatever their name, provided that they affect the computed income or the asset or right that produces them and are not of a punitive nature.

   • Doubtful debts under the conditions established by regulation.

   • Amounts accrued by third parties as a result of personal services.

2. The amounts allocated to the amortization of the property and other assets transferred with it, provided that they correspond to its effective depreciation, under the conditions determined by regulation.

DEDUCTIBLE EXPENSES FROM REAL ESTATE CAPITAL INCOME (art. 13 Rgl.)

All expenses necessary to obtain the net return on real estate capital will be considered deductible expenses for determining the net return on real estate capital.

In particular, the following shall be deemed to be included, among others:

1. The interest on third-party capital invested in the acquisition or improvement of the asset, right or faculty of use or enjoyment from which the returns and other financing costs arise, as well as the maintenance and repair costs.

   For these purposes, the following will be considered repair and maintenance expenses:

   • Those carried out regularly for the purpose of maintaining the normal use of material assets, such as painting, plastering or repairing facilities.

   • Those for replacing elements, such as heating systems, elevators, security doors or others.

   Amounts intended for expansion or improvement will not be deductible under this concept.

   Note:

   The total amount to be deducted for these expenses may not exceed, for each asset or right, the amount of the gross income obtained.

   The excess may be deducted in the following four years, without exceeding, together with the expenses for these same concepts corresponding to each

   one of these years, of the amount of the gross income obtained in each of them, for each asset or right.

2. Non-state taxes and surcharges, as well as state rates and surcharges, whatever their name, provided that they affect the computed income or the assets or rights that produce them and are not of a punitive nature.

3. Amounts accrued by third parties as direct or indirect compensation or as a result of personal services, such as administration, surveillance, concierge or similar.

4. Those caused by the formalization of the lease, sublease, transfer or constitution of rights and those of legal defense related to assets, rights or income.

5. Doubtful debts, provided that this circumstance is sufficiently justified. This requirement will be deemed to have been met:

   1. When the debtor is in a situation of bankruptcy.

   2. When more than six months have elapsed between the time of the first collection action carried out by the taxpayer and the end of the tax period, and no credit renewal has occurred.

   When a doubtful balance is collected after its deduction, it will be computed as income in the year in which said collection occurs.

6. The amount of the premiums for insurance contracts, whether for civil liability, fire, theft, glass breakage or others of a similar nature, on the assets or rights that produce the income.

7. Amounts allocated to services or supplies.

8. The amounts allocated to amortization under the conditions established in the article by regulation.

AMORTIZATION EXPENSES OF INCOME FROM REAL ESTATE CAPITAL (art. 14 Rgl.)

For the purposes of determining the net return on real estate capital, amounts allocated to the amortization of the property and other assets transferred with it will be considered deductible expenses, provided that they correspond to its effective depreciation.

Depreciation will be deemed to meet the effectiveness requirement:

1. Regarding real estate: when, in each year, they do not exceed the result of applying 3% to the highest of the following values: the acquisition cost paid or the cadastral value, without including the land value in the calculation.

   When the value of the land is not known, it will be calculated by prorating the acquisition cost paid between the cadastral values of the land and the construction for each year.

2. Regarding movable property, likely to be used for a period of more than one year and transferred together with the property: when, in each year, they do not exceed the result of applying to the acquisition costs paid the amortization coefficients determined in accordance with the amortization table approved for the simplified direct estimation regime.

Real rights of use and enjoyment

In the event that the income comes from the ownership of real rights of use or enjoyment, the acquisition cost paid may be amortized, up to the limit of the total income from each right.

Amortization, in this case, will be the result of the following rules:

1. When the right or faculty has a fixed term, the term resulting from dividing the acquisition cost paid for the right by the number of years of duration of the same.

2. When the right or faculty is for life, the result of applying the percentage of 3% to the acquisition cost paid.

Acquisition cost

The acquisition cost paid will be:

• In the case of properties acquired for valuable consideration : the acquisition price including the expenses and taxes inherent to the acquisition (notary, registration, non-deductible VAT, Property Transfer Tax and Documented Legal Acts, agency expenses, etc.) as well as the cost of the investments and improvements made.
• In the case of properties acquired free of charge (inheritance or donation): the value of the asset determined according to the rules of the Inheritance and Gift Tax, which may not exceed the market value, together with the expenses and taxes paid for its acquisition as well as the cost of the investments and improvements made.