Royal Decree-Law 12/2012, dated 30 march, introducing various tax and administrative measures aimed at reducing the public deficit

Madrid, April 2012 Royal Decree-Law 12/2012, dated 30 march, introducing various tax and administrative measures aimed at reducing the public deficit 1. INTRODUCTION On Saturday, 31 March 2012, Royal Decree-Law 12/2012 (RDL 12/2012) dated 30 March was published in the Official State Gazette, introducing various tax and administrative measures aimed at reducing the public deficit. The new RDL 12/2012, which entered into effect on Sunday, 1 April 2012, establishes very relevant modifications in taxation. It also modifies Law 33/2003 dated 3 November, on the Patrimony of Public Administrations, in order to generate savings in the management of publicly owned immovable assets. Of the new tax measures introduced, those made in the Corporate Income Tax (CIT) Law, approved by Royal Legislative Decree 4/2004, of 5 March, particularly in relation to the deductibility of financial expenses, stand out. There is also a specially relevant measure allowing taxpayers, both individuals and entities, to voluntarily bring their tax obligations up-to date by regularizing past situations and which, in this note, we will call measures to encourage the declaration of income derived from hidden assets or rights. In any case, the group of measures approved contains many others with great impact. This note is meant to be a summary of the tax measures introduced by RDL 12/2012, paying special attention to those that affect direct taxation as we understand that they are the most important. In this regard, after the executive summary included in the next section, section three summarizes the modifications made in CIT. Afterwards, section four describes the measures to encourage the declaration of income derived from hidden assets or rights. Finally, section five is a brief summary of other fiscal modifications introduced by RDL 12/2012 in relation to Personal Income Tax (PIT) as well as taxation on Tobacco Products and the Tax on the Increase in the Value of Urban Land. As we mentioned above, this note is exclusively aimed at summarizing the tax measures adopted in RDL 12/2012. It is not meant to be a thorough and detailed analysis of these measures nor of the controversial questions and interpretations that may arise. Royal Decree-Law 12/2012, dated 30 march 1

2. EXECUTIVE SUMMARY The following is an executive summary of the most significant tax modifications introduced by RDL 12/2012, which will be further developed afterwards: CIT modifications - Measures with indefinite duration i. Limitation of intra-group financial expenses for acquisitions of participations in group companies or for contributing capital or equity to the latter, unless valid economic reasons exist. ii. General limitation of the deduction of net financial expenses to 30% of the adjusted operating profits ( earning-stripping rule ) with certain exceptions (inclusion in operating profits of the dividends derived from certain participations). A net minimum financial expense of one million euros is permitted, regardless of the adjusted operating profit. Expenses exceeding this percentage may be offset for 18 years, and the accumulated balances not used may be applied during 5 years. Elimination of thin capitalization rule. iii. Elimination of free depreciation. iv. Taxation of income derived from the transfer of participations in foreign companies: the RDL 12/2012 permits partial application of the exemption provided in article 21.2 of the CIT Law in those cases in which requirements b) and/or c) of article 21.1 of the CIT Law are not fulfilled during part of the holding period. v. Article 44 of the CIT Law is modified, increasing the time limit for applying tax credits - from 10 and 15 years to 15 and 18 years, respectively (this latter period for the pending deductions for Research and Development and technical innovation - R+D+I - and promotion of information and communication technologies). - Measures applicable to tax periods beginning in 2012 and 2013 i. The deduction of goodwill regulated in articles 12.6 and 89.3 of the CIT Law is limited to a maximum annual amount of 1%. ii. Limitation on the application of tax credits for investments depending on the tax due of the year, reducing the former limits from 35% to 25% and from 60% to 50% (in both cases, on the total tax due less the tax credits to avoid double internal and international taxation and tax allowances); the latter percentage is applicable if the tax credit for R+D+I activities exceeds certain limits. Exceptionally, for these periods, the limits are also applicable to the deduction for the reinvestment of capital gains regulated in article 42 of the CIT Law. iii. The CIT payments on account of large-size companies cannot be less than 8% (4% in certain cases) of the accounting result of the tax year in the first 3, 9 and 11 months of the calendar year, less tax losses pending compensation, being the case, taking into account the limits applicable for offsetting them established in the measures approved in August 2011. As an exception, the payments on account to be made by 20 April 2012 cannot be less than 4% (2% in certain cases) of said result, reduced if appropriate. iv. The amounts of free depreciation pending application corresponding to fixed assets acquired prior to the enactment of RDL 12/2012 are limited to 20% or 40% of the taxable base (in this note this measure is analyzed jointly with the elimination of free depreciation). - Measures applicable to 2012 only i. Special tax on certain foreign source income, establishing an 8% rate applicable to dividends and capital gains derived from the transfer of participations in non-resident entities that do not comply with the requirement of being subject to a tax identical or analogous in nature to Spanish CIT (article 21 of the CIT Law). ii. Special tax declaration ( measure to encourage declaration of income derived from hidden assets or rights ): see the following section. Special tax declaration ( measure to encourage declaration of income derived from hidden assets or rights ) This measure is applicable to taxpayers subject to CIT, PIT and Non-resident Income Tax (NRIT). This special tax declaration allows taxpayers who own assets or rights which they have not declared for tax purposes, to declare the income derived therefrom at a special tax rate of 10%, exonerating them from responsibility. Various modifications are made in the General Tax Law to guarantee the effects of the voluntary regularization of the income derived from hidden assets or rights in relation with article 305 of the Penal Code. Royal Decree-Law 12/2012, dated 30 march 2

Other modifications - With respect to PIT, the regulation on free depreciation is adapted to the modifications established in the CIT Law. The taxation of the income obtained on the subsequent transfer of assets which have been freely depreciated is determined. - In the Tax on Tobacco Products, the definition of loose tobacco for rolling is modified. Likewise, the tax rates applicable to cigarettes are also modified. - In the Tax on the Increase in the Value of Urban Land, the reductions in the taxable base when cadastral values are modified as a consequence of a general collective evaluation procedure are changed from mandatory to optional for municipal governments. 3. CORPORATE INCOME TAX MODIFICATIONS RDL 12/2012 introduces permanent and temporary modifications in CIT. Some of the temporary modifications are applicable to tax periods beginning in 2012 and 2013, while others are only applicable in 2012. Consequently, this section is divided into three: i) indefinite measures, ii) measures applicable to tax years beginning in 2012 and 2013, and iii) measures applicable in 2012 only. 3.1 INDEFINITE MEASURES These measures are applicable to tax periods beginning as of 1 January 2012. They can be summarized as follows: i) limitation on intra-group financial expenses for acquisitions of participations in group companies or for making capital or equity contributions to them; ii) general limitation on the deduction of net financial expenses, depending on the adjusted operating profits ( earning-stripping rule ) and elimination of the thin capitalization rule, iii) elimination of free depreciation, iv) taxation of income derived from the transfer of participations in foreign companies, and v) time limit on the application of tax credits. 3.1.1 Limitation on intra-group financial expenses for acquisitions of participations in group companies or for making capital or equity contributions to them New letter h) is added to article 14.1 of the CIT Law. This new letter establishes that the financial expenses derived from debt with group entities as defined by article 42 of the Code of Commerce will not be deductible, regardless of the country of residence and the obligation to draw up consolidated annual accounts, to the extent that said debt is used to acquire participations in the capital or equity of any kind of entities from other group entities, or to make capital or equity contributions to other group entities. Notwithstanding, these financial expenses will be deductible to the extent that the taxpayer can prove that there are valid economic reasons for carrying out such operations. In this sense, the preamble of the RDL states that this provision allows not to be applicable to the extent that the operations are reasonable from an economic perspective, such as cases of group restructuring directly resulting from an acquisition from third parties, or cases in which the participated entities acquired are authentically managed from the Spanish territory. It is difficult to judge whether this new wording will solve the controversies arising in tax inspections carried out under the former rules with respect to the deduction of financial expenses in this type of operations, which has given rise to numerous litigations because, other than the aforementioned wording on the preamble, it does not establish whether the economic reasons should have repercussion on only the entity obtaining financing to acquire other participations or, on the contrary, as tax inspectors Royal Decree-Law 12/2012, dated 30 march 3

have been sustaining, said reasons should be justified based on the prior structure of the group in which the transactions take place. Likewise, the phrase authentic management could give rise to interpretative discrepancies, depending on whether it is taken to mean management of the participation or management of the participated entity s business. In any case, the wording of the rule seems similar to recent initiatives in neighboring countries. 3.1.2 General limitation on the deduction of net financial expenses, depending on the adjusted operating profits ( earning-stripping rule ). Elimination of the thin capitalization rule Prior to the approval of RDL 12/2012, financial expenses were limited by the thin capitalization rule in addition to transfer pricing rules and general anti-avoidance rules. The thin capitalization rule was not applicable to financial entities, and limited the financial expenses of taxpayers who had direct or indirect debt with related entities resident in tax havens or non-eu countries. RDL 12/2012 eliminates the thin capitalization rule for tax periods beginning as of 1 January 2012. On the other hand, it introduces a new general limitation on the deductibility of net financial expenses to a maximum amount of 30% of the adjusted operating profits of the year (commonly called earning-stripping rule ), regardless of how the debt is produced (that is, for debt with entities resident both inside and out of the EU, as well as Spanish debt), the object of the financing, as well as, in principle, whether or not the entities involved in the financing are related. The RDL states that, in any case, net financial expenses of the year will be deductible up to the limit of one million euros. This initiative is in line with legislative solutions adopted in other EU countries, specially Germany. Net financial expenses are understood to be the excess of financial expenses over financial income (income derived from loans granted to other parties). This calculation excludes financial expenses which were not deductible in application of new article 14.1.h of the CIT Law commented in the preceding section (intra-group financial expenses for the acquisition of participations in group companies or for the contribution of capital or equity to such entities). Adjusted operating profits are calculated on the basis of the operating profit of the profit and loss account, eliminating i) the depreciation/amortization of fixed assets, ii) the imputation of subsidies for non-financial fixed assets and others, and iii) the impairment and sale income of fixed assets; and adding financial income derived from participations in equity instruments, to the extent that they correspond to dividends or participations in the profits of entities in which at least a 5% direct or indirect participation is held or whose acquisition value is more than 6 million euros. As an exception, it must not be added the financial income of participated entities when they were acquired with debt for which interest was not deductible in application of article 14.1 h) of the CIT Law mentioned in the preceding section. It should be borne in mind that the net financial expenses not deductible because they exceed 30% of the adjusted operating profit of the year can be deducted along with the net financial expenses of a subsequent tax year during tax periods ending in the following 18 years, with the same limits. On the other hand, if the net financial expenses were lower than said limit during a certain tax period, the difference between that limit and the net financial expense of the year will increase the limit of financial expenses in the tax periods of the following 5 years, until the difference is deducted. Finally, certain exceptions and special rules are established for the application of the new general limitation on the deduction of net financial expenses, which can be summarized as follows: a) This limitation will not be applied to credit entities. As an exception, in the case of credit entities taxed under the tax consolidation regime with other companies which are not credit entities, the limit will be calculated on the basis of the adjusted operating profits and financial expenses of the latter. b) This limitation will not be applicable to entities that do not form part of a group as defined by article 42 of the Code of Commerce, unless i) the financial expenses derived from debt with persons or entities that hold at least a 20% direct or indirect participation in the taxpayer, or ii) the financial expenses derived from debt with entities in which the taxpayer holds at least a 20% participation, exceed 10% of the net financial expenses. c) In the case of companies taxed under the tax consolidation regime, the limit of net financial expenses will refer to the tax consolidated group. The net financial expenses pending deduction by an entity that joins the group will be deducted up to the limit of 30% of the entity s adjusted operating profit. If the group is extinguished or one of its members leaves, the tax group s net financial expenses pending deduction, if any, will be given the same treatment as that given to tax losses in these cases. d) Net financial expenses that had not been deducted by Economic Interest Groupings, both Spanish (AIEs) and European (AEIEs), and Temporary Joint Ventures ( UTEs ) (to the extent that the special tax regime regulated in article 48 of the CIT Law is applicable to them), will be attributed to their Spanish resident members, who will take them into account in order to apply the limit mentioned in this section. The expenses attributed to the members cannot be deducted by the AIE, AEIEs or UTEs. Royal Decree-Law 12/2012, dated 30 march 4

3.1.3 Elimination of free depreciation The Eleventh Additional Provision of the CIT Law regulated free depreciation of certain new tangible fixed assets and real estate investments. Initially, this incentive was only applicable to assets acquired in the 2009 to 2010 tax periods, and included the requirement of maintaining staff levels in order to apply it. Subsequently, this Provision was modified as of 14 April 2010 by RDL 6/2010 dated 9 April, on measures aimed at fomenting economic recuperation and employment, extending the application of the incentive to investments made during 2011 and 2012, retaining the requirement of maintaining staff levels. Finally, RDL 13/2010 of 3 December, on fiscal and labour actions and deregulations to encourage investment and job creation, modified the aforementioned Eleventh Additional Provision as of 3 December 2010. As of the enactment of RDL 13/2010, free depreciation was extended to new tangible fixed assets and real estate investments acquired in tax periods initiated up to and including the year 2015. Furthermore, the requirement of maintaining staff levels was eliminated. The sole abolishing Provision of RDL 12/2012 abolished the Eleventh Additional Provision of the CIT Law, and therefore, the free depreciation of new tangible fixed assets and real estate investments acquired as of 1 April 2012. Notwithstanding, the tax regime is maintained for acquisitions made prior to that date, with the modifications described below. Thus, for assets acquired before 1 April 2012 entitled to free depreciation, a limit is established on the free depreciation, although only for tax periods initiated during 2012 or 2013. This limitation, which we summarize below, is not applicable to the assets that had been acquired in the tax periods in which the taxpayer complied with the requirements of article 108.1 of the CIT Law, that is, in those tax periods in which the taxpayer could apply the tax incentives for small companies (which required a net turnover of the group of less than 10 million euros in the preceding tax period). The limitation established for the tax periods initiated in 2012 and 2013 can be summarized as follows: - The pending deduction for free depreciation generated by virtue of RDL 6/2010 can be applied up to the limit of 40% of the taxable base prior to its application and to the compensation of tax losses. - The pending deduction for free depreciation generated by virtue of RDL 13/2010 can be applied up to the limit of 20% of the taxable base prior to its application and to the compensation of tax losses. - In case a taxpayer has amounts pending application generated by virtue of both Royal Decree-Laws, the limit of 40% will be applied to the amounts generated in accordance with RDL 6/2010. The amounts corresponding to the 20% limit (RDL 13/2012) can only be applied if those corresponding to RDL 6/2010 had not reached 20%. - The aforementioned limitations will also be applicable to the free depreciation derived from current investments made up to 1 April 2012 corresponding to new elements ordered under work contracts or investment projects which require more than two years to execute between the date of the order or the initiation of the investment and the date of its disposal or functioning 3.1.4 Taxation of income derived from the transfer of participations in foreign companies Article 21.1 of the CIT Law establishes an exemption for dividends and participations in profits of non-resident entities when certain requirements are fulfilled. These requirements can be summarized as follows: a) at least a 5% participation must have been held in the non-resident entity for an uninterrupted period of one year, b) the non-resident entity must be subject to a tax which is identical or analogous in nature to Spanish CIT, and c) the profits of the non-resident entity must derive from business activities carried out abroad (as defined by article 21.1 c) itself and by article 107.2 of the CIT Law to which the former refers). Article 21.2 of the CIT Law establishes an exemption for income obtained on the transfer of a participation in an entity not resident in Spanish territory. In order to apply this exemption, requirement a) of the preceding paragraph must be complied with on the date of transfer of the participations, while requirements b) and c) must be fulfilled in each of the years in which the participation is held. RDL 12/2012 allows partial application of the exemption of article 21.2 of the CIT Law in those cases in which requirements b) and/or c) of article 21.1 of the CIT Law are not complied with in some of the years in which the participation is held, in order to not deny the full exemption due to the fact that the requirements had not been fulfilled in a certain year. Thus, in these cases, there are different rules for the timing of the allocation of the capital gains to identify periods of compliance eligible for the exemption, and periods of non-compliance for which no exemption can be claimed, establishing the following: - The part of the income that corresponds to an increase in undistributed profits generated by the participated entity during the participation holding period will be exempt to the extent that it was generated in years in which requirements b) and c) of article 21.1 of the CIT Law were fulfilled. - The part of the income that does not correspond to an increase in undistributed profits generated by the participated entity during the participation holding period will be exempt in proportion to the tax periods in which requirements b) and c) were fulfilled during the participation holding period, and the total holding period. If there is proof to the contrary, it could be understood that this part of the income was not generated in the proportion above but in another proportion as proven. Royal Decree-Law 12/2012, dated 30 march 5

RDL 12/2012 also establishes that the part of the income not entitled to the exemption in accordance with the two above paragraphs will be entitled, being the case, to apply the tax credit for the avoidance of double international taxation foreseen in article 31 of the CIT Law. Logically, in order to avoid cases of non-taxation, only the proportional part of the tax that corresponds to the non-exempt income should be considered in order to calculate the tax effectively paid abroad that entitles the taxpayer to the tax credit. Due to the complexity of article 21 of the CIT Law, the above modification has triggered the modification of other of its paragraphs (e.g. participation valued in accordance with the rules of the special regime regulated in chapter VIII of title VII of the CIT Law, participation previously transferred by another entity that meets the requirements listed in article 42 of the Code of Commerce, etc.) in order to adapt them to the new regulation. These modifications are not described herein, as they are applicable in very specific cases and exceed the purpose of this note. Finally, it should be taken into account that, as we comment below, for 2012 an option is established for the taxation of the income derived from the transfer of securities representing the equity of entities not resident in Spanish territory. 3.1.5 Time limit on the application of tax credits Prior to the approval of RDL 12/2012, article 44 of the CIT Law established that, in general, the tax credits to promote certain activities regulated in chapter IV of title VI of the CIT Law which had not been applied in the year in which they were generated, could be deducted in the following 10 years. As an exception, tax credits for R+D+I activities as well as for the promotion of information and communications technologies could be applied during the following 15 years. RDL 12/2012 increases these periods from 10 and 15 years to 15 and 18 years, respectively. This RDL introduces a new thirty-sixth transitory provision in the CIT Law, according to which the new deadline of 15/18 years will also be applicable to the tax credits pending application at the beginning of the first tax period beginning as of 1 January 2012. 3.2 MEASURES APPLICABLE TO TAX PERIODS INITIATED IN 2012 AND 2013 These measures affect: i) the deduction of goodwill, ii) the limitation on the application of tax credits depending on the tax due of the year, and iii) the CIT payments on account of large-size companies. Likewise, a limitation is established for 2012 and 2013 on the deduction of free depreciation pending application corresponding to immovable assets acquired prior to the enactment of RDL 12/2012. Notwithstanding, for the sake of clarity, this limitation was analyzed above along with the elimination of free depreciation, in the section on indefinite measures. 3.2.1 Goodwill deduction In accordance with the CIT Law, prior to the enactment of RDL 12/2012, provided that certain requirements were fulfilled, the depreciation of goodwill obtained on acquisitions for a consideration (article 12.6 of the CIT Law) as well as on certain corporate restructuring procedures (article 89.3 of the CIT Law) was deductible up to an annual maximum limit of 5%. As a consequence of the approval of RDL 12/2012, this maximum percentage of deduction is 1% for tax periods beginning during the years 2012 and 2013. The part of the deduction that could not be applied in those periods could be applicable in future periods. This reduction of the deduction rate is in line with the modification introduced by Royal Decree-law 9/2011, of 19 August (RDL 9/2011), for the commonly called financial goodwill regulated in article 12.5 of the CIT Law. The limitation does not affect the tax depreciation rate of intangible fixed assets without a definite useful life regulated in article 12.7 of the CIT Law. 3.2.2 Limitation on the application of tax credits depending on the tax due of the year Prior to the approval of RDL 12/2012, the tax credits for the elimination of double domestic and international taxation and tax allowances could be applied up to the limit of the tax due of the year. If there were still an amount due after applying the tax credits for elimination of double taxation and the tax allowances, the other tax credits regulated in chapter IV of title VI of the CIT Law to promote certain activities could be applied, as a general rule, up to a maximum amount of 35% of said tax due less the tax credits for double taxation and the tax allowances ( reduced tax due ). Nonetheless, when the amount of the tax credit for R+D+I activities corresponding to expenses and investments made in the tax period exceed 10% of the reduced tax due, this limit is increased to 60%. As an exception among the tax credits for investments, the tax credit for the reinvestment of capital gains regulated in article 42 of the CIT Law was not subject to any limit. RDL 12/2012 reduces the above limits from 35% to 25% and from 60% to 50%, respectively, for tax periods beginning in 2012 and 2013. On the other hand, it establishes that for those periods, the limit is also applicable to the tax credit for the reinvestment of capital gains regulated in article 42 of the CIT Law. Royal Decree-Law 12/2012, dated 30 march 6

As mentioned above when analyzing the indefinite CIT measures introduced, this modification is accompanied by an increase in the period for utilizing tax credits not applied in the year in which they are generated. 3.2.3 Minimum amount of payments on account for large-size companies The CIT Law establishes two methods for calculating payments on account, one depending on the tax due of the last tax period for which the filing deadline had elapsed (regulated in article 45.2 of the CIT Law), and the other calculated on the basis of the taxable base corresponding to the first 3, 9 or 11 months of the calendar year (article 45.3 of the CIT Law). This second method is mandatory for taxpayers with a turnover for VAT purposes of more than 6,010,121.04 during the twelve months prior to the starting date of the tax period. Other taxpayers will in principle apply the method of article 45.2 of the CIT Law ( tax due method ), although they may choose to apply the method foreseen in article 45.3 of the CIT Law. RDL 12/2012 establishes a minimum amount of payments on account for those taxpayers that apply the method foreseen in article 45.3 of the CIT Law (generally known as the base method ) and that have a net turnover of at least 20 million euros in the twelve months preceding the starting date of the 2012 and 2013 tax periods. In these cases, during the tax periods beginning in 2012 and 2013, payments on account may not be less than 8% of the accounting result of the tax period corresponding to the first 3, 9 and 11 months of the calendar year, less the tax losses pending compensation, observing the limits on the application of tax losses introduced by RDL 9/2011 (limit of 75% of the taxable base for entities with a turnover of at least 20 million euros and less than 60 million euros during the 12-month period preceding the beginning of the tax period; 50% when said amount was at least 60 million euros). The applicable rate will be 4% instead of 8% for companies in which at least 85% of the income of the first 3, 9 or 11 months of the calendar year is eligible for application of the exemptions established in article 21 of the CIT Law (dividends and exempt foreign-source income derived from the transfer of securities representing the equity of entities not resident in Spanish territory) and article 22 of the CIT Law (exempt income obtained abroad through a permanent establishment) or eligible for application of the tax credit of article 30.2 of the CIT Law (dividends or participations in profits of Spanish resident entities that generate the right to apply a 100% tax credit from the tax due). Finally, RDL 12/2012 establishes the above percentages will be 4% and 2% instead of 8% and 4%, respectively, for the prepayment due on 20 April 2012. Furthermore, the new limitation on the deductibility of net financial expenses mentioned above will not be applicable in this first prepayment. 3.3 MEASURES APPLICABLE IN 2012 ONLY These measures consist of i) the introduction of a special tax on dividends, participations in profits or capital gains derived from the participation in the equity of non-resident entities, and ii) the introduction of measures to encourage the declaration of income derived from hidden assets or rights. 3.3.1 Special 8% tax on dividends, participations in profits or capital gains derived from the participation in the equity of non-resident entities As mentioned above, the exemption for foreign-source dividends and capital gains regulated in article 21 of the CIT Law is conditioned to the compliance with certain requirements. Among these requirements, the foreign entity distributing the dividend or whose transfer has produced a capital gain must be subject to a tax identical in nature or analogous to Spanish CIT (requirement b) of article 21.1 of the CIT Law). In some cases, due to its high fiscal cost, the failure to comply with this requirement made it difficult for Spanish companies to be receptive to the idea of a distribution of dividends by the non-resident entities in which they participated or the transfer of participations held in them. A fifteenth additional provision has been introduced into the CIT Law in order to facilitate the repatriation of dividends or the generation of capital gains on the transfer of participations in foreign entities which, although they carry out business activities abroad (requirement c) of article 21 of the CIT Law), do not comply with requirement b) of article 21.1 of the CIT Law (e.g. because they are located in low tax territories or in tax havens). This additional provision allows taxpayers to opt for a special tax on foreign-source dividends and income derived from the transfer of securities in nonresident entities. The special tax, which can only be applied if the taxpayer fulfills the requirements of letters a) (at least a 5% participation held for at least one year) and c) (profits derived from business activities carried out abroad) of article 21.1 of the CIT Law, has the following main characteristics: This tax is optional. If the taxpayer does not opt to apply it, it will be subject to normal CIT rules. The requirement that the profits of the participated entity derive from business activities carried out abroad (letter c) of article 21.1 of the CIT Law) can be determined for each entity based on the total income obtained during the participation holding period. In case of a distribution of dividends, the taxable base will consist of the full amount of the dividends or the participations in profits accrued, without being able to deduct the impairment loss that may arise as a result of the dividend distribution. The tax will accrue on the date of the General Shareholders Meeting s resolution to distribute profits. Royal Decree-Law 12/2012, dated 30 march 7

In case of a transfer of participations, the taxable base will consist of the income obtained on the transfer as well as the reversal of any impairment that had been deductible for tax purposes. The tax will accrue on the day of the transfer. The special tax rate is 8%. Notwithstanding, in the case of reversals of any impairment, the income corresponding to the reversal will be subject to the tax rate corresponding to the taxpayer (in general, 30%). The special tax only applies to income accrued in 2012. The accounting expense corresponding to the special tax will not be tax-deductible. Taxpayers may not apply the tax credit for the avoidance of double international taxation contained in articles 31 and 32 of the CIT Law to the dividends or capital gains derived from the transfer of participations that benefit from the special tax. The tax must be filed and the amount due paid within 25 calendar days following the accrual of the income. 3.3.2 Measures to encourage the declaration of income derived from hidden assets or rights These measures are applicable to not only CIT taxpayers, but also PIT and NRIT taxpayers. They are described in the following section. 4 MEASURES TO ENCOURAGE THE DECLARATION OF INCOME DERIVED FROM HIDDEN ASSETS OR RIGHTS: CIT, PIT AND NRIT The preamble to RDL 12/2012 establishes that it is considered important to encourage taxpayers to voluntarily bring their tax obligations up-to date by regularizing past situations. For this purpose, the first additional Provision of RDL 12/2012 includes a Special tax declaration which allows CIT, PIT and NRIT taxpayers who own assets or rights for which they did not declare income in their tax returns, to do so now at a special tax rate, exonerating them from responsibility. The conditions and characteristics of the Special tax declaration are the following: The taxpayer should have owned the assets or rights for which its tax situation is being regularized prior to the end of the last tax period for which the filing deadline had elapsed at the enactment of RDL 12/2012 (as a general rule, the taxpayer should have owned them in 2010 or earlier). The rate to be applied to the amount or acquisition value of the assets and rights being regularized is 10%. As a result of regularization, no interest, penalties or surcharges will be applicable. Taxpayers may not regularize assets or rights corresponding to tax periods for which they had been informed of the commencement of a tax inspection or verification procedure. The regularization should be carried out by filing a return and paying the amount due by no later than 30 November 2012. The information required to identify the assets or rights being regularized should be attached. Articles 180 and 221 of the General Tax Law are modified in order to adapt them to the special tax declaration. The modifications introduced in this sense are aimed at solving some of the problems connected to these voluntary regularizations: - They establish that tax inspectors will consider the tax paid by virtue of this special regime as a complete regularization of the taxpayer s tax situation, for which the tax inspector is no longer obliged to account for to the Public Prosecutor s Office. Specifically, the regularization carried out will exonerate the taxpayer from penal liability, even if the infraction committed in the past could constitute a crime against the Public Treasury. Royal Decree-Law 12/2012, dated 30 march 8

- This special regime try to solve the problem derived from the different tax and penal statutory periods (4 and 5 years, respectively), legitimizing actions aimed at regularizing the taxpayer s situation for penal purposes by making tax payments corresponding to the fifth year, which previously to RDL 12/2012 had to be considered as a payment incorrectly made (due to the impossibility of waiving the statutory period elapsed for tax purposes). The rule now extends the effects of regularization to this fifth year, declaring that the tax payments made will not be considered to be inappropriately made, that is, expressly allowing regularizations corresponding to this fifth year to represent full regularization. 5. OTHER MEASURES 5.1 PERSONAL INCOME TAX In order to adapt the free deprecation established in the PIT Law to the text of RDL 12/2012, the thirtieth Additional Provision of Law 35/2006 is modified, allowing free depreciation to be applied for investments carried out up until the enactment of RDL 12/2012, limited to the net positive income of the economic activity prior to the deduction for free depreciation. Likewise, RDL 12/2012 regulates the taxation of capital gains obtained on the subsequent transfer of an asset that had been subject to accelerated depreciation. In this sense, it establishes that the amount corresponding to the reversal of free depreciation will be considered income derived from the economic activity, and not savings income. 5.2 TAX ON TOBACCO PRODUCTS In relation with the Tax on Tobacco Products, the definition of smoking tobacco is modified in article 59.5 of Law 38/1992, on Special Taxes. Thus, as mentioned in the preamble to RDL 12/2012, smoking tobacco is compared to loose tobacco for rolling when it is sold or going to be sold to roll cigarettes, since this smoking tobacco must receive the same treatment as fine loose tobacco for rolling for the sake of a fair and uniform taxation. On the other hand, the tax rates applicable to cigarettes are modified, so that the proportional rate is reduced from 57 to 55 percent, and the specific rate is increased from 12.7 euros to 19 euros for each 1,000 cigarettes. 5.3 TAX ON THE INCREASE IN THE VALUE OF URBAN LAND The information contained herein [or insert the name of the publication, newsletter, or other mailing] is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. 2012 KPMG Abogados S.L., a limited liability Spanish company, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International. With respect the Tax on the Increase in the Value of Urban Land (commonly called plusvalía municipal ), municipal governments are now empowered to apply a reduction in the taxable base when cadastral values are modified as a consequence of a general collective valuation procedure. In this sense, article 107.3 of the Law on Municipal Treasuries is modified so that, in order to determine the taxable base of this tax: The reduction in the taxable base is established as optional, instead of mandatory. It eliminates the minimum percentage of reduction which, prior to the enactment of RDL 12/2012, was 40%. It does not establish the automatic application of the maximum percentage of reduction of 60% for those municipalities whose government has not established a percentage. Royal Decree-Law 12/2012, dated 30 march 9