JOHN CARLOS I

KING OF SPAIN

To all who present it and understand it.

Sabed: That the General Courts have approved and I come to sanction the following Law:

EXPLANATORY STATEMENT

This Law addresses a matter of broad significance in the Corporate Tax, namely the treatment of dividends and capital gains relating to securities representing the equity of entities ' capital. legal residents both in Spain and abroad. Addressing in unity of act the treatment of national and foreign dividends and capital gains is fully justified, given the globalization of the economy and the growing expansion of our companies in the international markets. whose promotion and support constitutes one of the justifications for this provision.

As regards dividends and capital gains relating to entities resident in Spanish territory, the essential novelty of the rule is to establish the double taxation deduction not only at the time of the distribution of the dividend or profit share, but also at the time of the transfer of shares. This new approach is justified in that the surplus value reflects the evolution of the equity of the investee entity, and therefore the shareholder or shareholder in transmitting the stake is obtaining the undistributed profits generated during the period of holding of the holding.

This new treatment of the double taxation deduction will allow, unlike the current one, to eliminate double taxation from the very first moment in which it manifests itself, established a perfect correlation between income integration in the tax base and application of the double taxation elimination systems.

As far as dividends and foreign-source capital gains are concerned, the novelty consists in the incorporation of the so-called exemption method for each other, provided that certain requirements are met, the most notable of them the place of residence of the participating entity, which must be a country with which Spain has an agreement to avoid the double international imposition provided with clause of exchange of information, and the activity performed by the investee entity, which must be of a business nature.

It should be noted that the treatment of dividends and capital gains from both domestic and foreign sources is remarkably close, which represents a significant boost to the principle of neutrality.

The exemption method will allow our companies to compete on a level playing field, for tax purposes, on international markets, while effectively removing tax obstacles to the repatriation of dividends.

The imputation method continues to apply to those taxable persons who so wish or who do not comply with the requirements for the application of the exemption method.

Special mention should be made of the exquisite care that the standard has had in order to avoid that the income classified as being susceptible to inclusion in the tax base for the purposes of the international tax transparency, could enjoy the exemption method.

Article first. Deduction for double internal taxation of dividends.

Article 28 of Law 43/1995, of December 27, of the Company Tax, will be worded as follows:

" Article 28. Deduction to avoid internal double taxation: Internal source dividends and capital gains.

1. Where dividends or shares in profits of other entities resident in Spain are included in the income of the taxable person, 50 per 100 of the full share corresponding to the tax base derived from those dividends or Profit shares.

The tax base derived from dividends or stakes in profits shall be the full amount of the dividends.

2 The deduction referred to in the preceding paragraph shall be 100 per 100 where the dividends or profit shares come from participating entities, directly or indirectly in at least 5 per 100, provided that the participation has been continuously held during the year preceding the day on which the profit to be distributed is payable. The deduction will also be 100 per 100 for the perceived benefits of general insurance mutuals, social precision entities, mutual guarantee societies and associations.

3 The deduction shall also apply in the case of company settlement, separation of partners, acquisition of shares or equity for redemption and dissolution without settlement in merger transactions, total division or total divestiture of the assets and liabilities, in respect of the computed income derived from those transactions, in the part corresponding to the undistributed profits, even those that would have been incorporated in the capital.

The deduction shall also be made on the income that the company performing the operations referred to in the preceding paragraph must integrate into the taxable base in accordance with the provisions of Article 15.3 of this Law.

4. The deduction provided for in the preceding two paragraphs shall not apply in respect of the following income:

(a) Those arising from the reduction of the capital or the distribution of the premium for the issue of shares or units, without prejudice to the provisions of the last subparagraph of the previous paragraph.

When, in conjunction with the operations referred to in the preceding paragraph, the distribution of dividends or participations in profits occurs, the deduction shall be applied in accordance with the rules laid down in the Article.

(b) Those provided for in the preceding paragraphs, where prior to their distribution there has been a reduction in capital to constitute reserves to offset losses, or the transfer of the issue premium to reserves; or a contribution from the partners to replenish the equity, up to the amount of the reduction, transfer or contribution.

The provisions of the foregoing paragraph shall not apply in respect of distributed income which has been integrated into the tax base without having been produced in respect of the same as the compensation of negative taxable bases, except that the non-compensation would have been derived from the provisions of Article 23 (2) of this Law.

c) Those distributed by the public nature regulation fund of the mortgage market.

(d) Where the distribution of the dividend or the profit share does not determine the income integration in the tax base or where such distribution has resulted in a depreciation in the value of the share, for purposes tax. In this case the recovery of the value of the stake will not be integrated into the tax base.

The above paragraph will not apply when:

(a ') The taxable person proves that an amount equivalent to the depreciation of the value of the holding has been integrated into the tax base of the Company Tax on any of the tax rates provided for in the Article 26 (1), (2) and (7) of that tax, in the form of income obtained by successive entities which own the holding on the occasion of their transfer, and which has not been entitled to the double taxation deduction dividends. The deduction shall be partially applied where the proof referred to in this point is partial.

b ') The taxable person proves that an amount equivalent to the depreciation of the value of the stake has been integrated into the taxable base of the Income Tax of the Physical Persons, in terms of income obtained by the successive natural persons who own the holding, on the occasion of their transfer. The deduction shall be partially applied where the proof referred to in this point is partial.

In the case provided for in this point (b), the deduction may not exceed the amount resulting from applying to the dividend or the share in profits the rate of charge as in the Income Tax on Persons Physical activity corresponds to the increases in wealth derived from the transmission of acquired assets more than two years in advance.

5. Where the income of the taxable person is calculated as a result of the transfer of securities representing the capital or the own funds of entities resident in Spanish territory which are taxed at the general rate of charge or at the rate of 40 100, it shall be deducted from the full quota the result of applying the rate of charge to the net increase of undistributed profits, even those which have been incorporated in the share capital, corresponding to the share transmitted, generated by the participating entity during the holding time of that holding or the amount of the calculated income if this is less.

This deduction will be practiced whenever the following requirements are met:

a) That the percentage of participation, direct or indirect, before the transmission is equal to or greater than 5 per 100.

(b) That percentage has been continuously owned during the year before the day the participation is transmitted.

When, due to the date of acquisition of the holding, the amount of the undistributed profits on the date of acquisition of the holding could not be determined, the securities shall be presumed to have been acquired by their theoretical value.

The application of this deduction shall be incompatible with the reinvestment deferral provided for in Article 21 of this Law, in the part corresponding to the income that has enjoyed the deduction provided for in the This section.

The provisions of this paragraph shall also apply to the transmission of securities representative of the capital of the entities referred to in Article 26 (2) (b) of this Law, and shall apply to such transfers. effects, the rate of charge referred to in paragraph 2.

The deduction provided for in this paragraph shall not apply in respect of the part of the net increase in undistributed profits corresponding to non-integrated income in the taxable base of the investee due to the compensation of negative taxable bases.

6. The amounts not deducted for the full quota shortfall may be deducted from the full quotas for the tax periods concluded in the immediate and successive seven years. "

Article 2. Dividends and foreign-source capital gains.

Two articles are added, with the numbers 29a and 30a, to Law 43/1995, of December 27, of the Corporation Tax, with the following content:

" Article 29a. Deduction to avoid international double taxation in the case of income obtained through permanent establishment.

1. In the case of a personal obligation to contribute, where income obtained through permanent establishments located abroad is included in the taxable amount of the taxable person, 100 per 100 of the corresponding full quota shall be deducted to the positive income of all permanent establishments in respect of which the following requirements are met:

(a) That the income obtained by the permanent establishment is subject to and not exempt from a tax of characteristics comparable to that tax is not situated in a country or territory which is regulated as a paradise fiscal.

(b) That the income of the permanent establishment is derived from the conduct of business activities abroad in the terms provided for in Article 130 (1) (c) of this Law.

(c) the permanent establishment is situated in a country with which Spain has an agreement to avoid international double taxation which is applicable to it, and which contains a clause for the exchange of information, or in a country contained in the list of countries that may be regulated, in order to ensure that they have a tax of characteristics comparable to that tax.

2. The amount of the deduction referred to in the preceding paragraph shall be reduced by the amount resulting from the application of the tax rate to the negative income of the permanent establishments, which satisfy the requirements referred to in that paragraph, which have been integrated into the taxable base of the taxable person in an earlier tax period.

3. The application of the deduction provided for in paragraph 1 of this Article shall be incompatible, for the same income, with the reinvestment deferral and the reinvestment exemption, respectively, in Articles 21 and 127 of this Article. law.

4. Where the permanent establishment complies with the requirements laid down in paragraph 1 and, at the same time, it obtains income from those provided for in Article 121 (2) of this Law, the deduction to which it is granted shall not be applied in respect of such income. refers to paragraph 1

5. If the permanent establishment is situated in a country with which Spain has entered into force after the date of entry into force of this provision, Spain shall sign an agreement to avoid international double taxation, the deduction being referred to in paragraph 1 above, it shall apply only if it is provided for in that convention, either expressly or by reference to the Spanish law.

6. The amounts not deducted for the full quota shortfall may be deducted from the full quotas for the tax periods concluded in the immediate and successive seven years.

7. The deduction provided for in paragraph 1 shall be incompatible with the deductions to avoid double international taxation laid down in this Chapter. '

" Article 30a. Deduction to avoid international double taxation: Foreign source dividends and capital gains.

1. In the case of a personal obligation to contribute, where dividends or shares in profits of non-resident entities are included in the income of the taxable person in Spanish territory, 100 per 100 of the full quota shall be deducted corresponds to the tax base derived from those dividends or shares in profits.

The tax base derived from dividends or stakes in profits shall be the full amount of the dividends.

2. Also in the case of a personal obligation to contribute, where the income of the taxable person is calculated as a result of the transfer of securities representative of the capital or the own funds of non-resident entities on Spanish territory, the result of applying the tax rate to the net increase of the undistributed profits, corresponding to the share transmitted, generated by the participating entity during the time of the holding, shall be deducted from the fee. share or the amount of the income, computed if this is less.

When, due to the date of acquisition of the holding, the amount of the undistributed profits on the date of acquisition of the holding could not be determined, the securities shall be presumed to have been acquired by their theoretical value.

3. The application of the deductions provided for in the previous two paragraphs shall be conditional upon compliance with the following requirements:

(a) that the direct or indirect participation in the capital of the non-resident entity is at least 5 per 100 and that the non-resident entity has been held uninterruptedly during the year preceding the day on which the the benefit to be distributed or the day the transmission occurs.

b) That the participating entity is subject and not exempt from a characteristic lien comparable to this Tax and is not resident in a country or territory that is regulated as a tax haven.

(c) The income of the participating entity from which the dividends or shares in profits are derived is derived from the conduct of business activities abroad in the terms of point (c) of the Article 130 (1) of this Law.

(d) that the participating entity is resident in a country with which Spain has an agreement to avoid international double taxation, which is applicable to it, and which contains a clause for the exchange of information; or a country contained in the list of countries which may be established, in order to ensure that they have a characteristic tax comparable to that tax.

Additionally, in the case of income derived from the transfer of securities, the person or entity acquiring, if resident in Spanish territory, shall not be bound by the transmitting entity.

The requirements set out in points (b) and (c) shall be met in each and every holding holding exercise for the purposes of applying the provisions of paragraph 2.

4. The taxable person who receives the dividends or the profit share shall not be included in the taxable amount of the share arising from the distribution of the profits, in accordance with the terms of paragraph 5 of the Article previous.

5. The application of the deduction provided for in paragraph 2 shall be incompatible with the reinvestment deferral provided for in Article 21 of this Law, in the part corresponding to the income which the deduction provided for in that provision has enjoyed. paragraph.

6. Where the participating entity complies with the requirements laid down in paragraph 3 and, at the same time, obtains income from those provided for in Article 12 (2) of this Law, the provisions of that Article 121 shall apply in respect of the (a) the income referred to in this Article shall be subject to the provisions of this Article in respect of any other income obtained by the participating entity.

dividends and shares in profits arising from the income made in accordance with Article 121 (2) of this Law obtained in periods prior to the application of the provisions of Article 10 of Law 42/1994, of 30 December, of fiscal, administrative and social measures, shall not be entitled to the deduction provided for in paragraph 1. If, in the same party, the income provided for in Article 121 (2) of this Law is co-existed with income for which the provisions of this Article are applicable, the provisions of Article 121 (2) of this Law shall be subject to the provisions of Article 121 (2) of the Treaty. in the social agreement for the purposes of determining the income to be distributed, and in the absence of an express mention in the social agreement, the income to which this Article applies shall be read first.

The same rule shall apply in respect of the income referred to in paragraph 2 in the part corresponding to income classified in Article 121 (2) of this Law.

7. In the event that the participating entity resides in a country with which, after the entry into force of this provision, Spain has signed an agreement to avoid double international taxation, the provisions of paragraphs 1 and 2 only be applicable if it is provided for in that convention, either expressly or by reference to the Spanish law.

8. This deduction shall be incompatible with that laid down in Articles 29 and 30 of this Law.

9. The amounts not deducted for the full quota shortfall may be deducted from the full quotas for the tax periods concluded in the immediate and successive seven years. "

Article 3. Regime of foreign securities holding entities.

1. Article 130 of Law 43/1995 of 27 December of the Company Tax will be worded as follows:

" Article 130. Income derived from the holding of securities representing the own funds of non-resident entities on Spanish territory.

1. Dividends or shares in profits from non-resident entities on Spanish territory shall not be included in the tax base, provided that the following requirements are met:

(a) That the percentage of the holding referred to in the previous article has been continuously held during the preceding year to the day that dividends or shares in profits are payable. For the purposes of calculating the said period, account shall also be taken of the period in which the holding has been held uninterruptedly by another entity of the same consolidation group as referred to in Article 42 of the Code of Commerce.

(b) That the participating entity is subject and not exempt from a tax of an identical or similar nature to the Company Tax and is not resident in a country or territory that is regulated as a tax haven.

(c) That the income from which dividends or shares in profits come from is derived from the conduct of business activities abroad. For these purposes the following rules will be taken into account:

(a ') On a general basis, the revenue obtained by the participating entity must, at least in 90%, be carried out by the undertaking of business activities within the meaning of Article 40 of Law 18/1991 of 6 June 1991, Tax on the Income of the Physical Persons. It shall also be understood to include those arising from the transfer of property assets to the carrying out of business activities and dividends or shares in profits and income derived from the transfer of the participation of non-resident entities in Spanish territory which comply with the requirements set out in this paragraph in respect of which the institution resident in Spanish territory has a direct or indirect participation, or greater than 5 per 100.

(b) In the case of wholesale trade, the following shall be considered as income from business activities carried out abroad as a result of transactions in which the goods are placed at the disposal of the acquirers in the country or territory in which the participating entity resides or in any other country or territory other than Spanish where they are carried out through the organisation of personal and material means available to the institution participated.

(c ') In the case of services, they shall have the consideration of income from business activities carried out abroad by the persons deriving from the provision of services which are used in the country or territory in which they are a resident entity or any other country or territory other than Spanish where they are made through the organisation of personal and material means available to the participating entity.

d') Dealing with credit and financial transactions shall be considered as income from business activities carried out abroad by the derivatives of loans and loans granted to persons or entities resident in the country or territory in which the participating entity resides or in any other country or territory other than Spanish where they are carried out through the organisation of personal and material means available to the institution participated.

e ') Dealing with the conduct of insurance and reinsurance operations shall have the consideration of income from business activities carried out abroad by derivatives of transactions in which the risks insured persons are in the country or territory in which the participating entity resides or in any other country or territory other than Spanish when they are carried out through the organization of personal and material means of has the entity involved.

2. The income from the transfer of the holding shall not be included in the taxable amount, provided that:

(a) The requirements set out in the previous paragraph are met. The requirements laid down in points (b) and (c) shall be fulfilled in each and every exercise of holding the holding. The requirement referred to in point (a) shall be understood as referring to the day on which the transmission occurs.

(b) The acquiring person or entity, if resident in Spanish territory, is not bound by the transmitting entity.

3. It shall not be included in the tax base of the entity that receives dividends or the profit share the depreciation of the share of the profit distribution, whatever the form and the tax period in which such depreciation is apparent, except that the amount of the abovementioned benefits has been taxed in Spain on the occasion of a previous transmission of the holding.

The amount of the depreciation shall be that corresponding to the profits earned by the entity that distributes them prior to the acquisition of the holding on the same.

4. Dividends or shares in profits and income obtained in the transfer of participation which have not been incorporated in the tax base shall not be entitled to the deductions provided for in Articles 29, 30 and 30a of this Law.

5. Where the participating entity complies with the requirements laid down in paragraph 1 and, at the same time, obtains income from those provided for in Article 121 (2) of this Law, the provisions of that Article 121 shall apply in respect of the (a) the income referred to in this Article shall be subject to the provisions of this Article in respect of any other income obtained by the participating entity.

dividends and shares in profits arising from the income of the typified in Article 121 (2) of this Law obtained in exercises prior to the application of the provisions of Article 10 of the Law 42/1994, of 30 December, of fiscal, administrative and social measures, they must be integrated into the tax base. In the case of the participation of the investee in the income provided for in paragraph 2 of the Article, the provisions of the social agreement for the purpose of determining the income to be distributed shall be subject to the provisions of the social agreement. expressed in the social agreement, the income to which this Article applies shall be the first to be read.

The same rule shall apply in respect of the income referred to in paragraph 2 in the part corresponding to income classified in Article 121 (2) of this Law. "

2. Article 131 of Law 43/1995 of 27 December 1995 on Corporate Tax will be read as follows:

" Article 131. Profit distribution.

Benefits distributed from non-integrated income in the tax base will receive the following treatment:

(a) Where the recipient is an entity subject to this tax, the received benefits shall not entitle the deduction to double taxation of dividends, but the deduction may be applied by the receiving entity for a double international taxation in the terms provided for in Articles 29, 30 and 30a of this Law in respect of taxes paid abroad corresponding to the income which has contributed to the formation of the said benefits received. For these purposes, the first distributed profit shall be understood to be derived from income integrated in the tax base.

(b) Where the recipient is a person subject to the Income Tax of the Physical Persons, the distributed benefit shall not entitle the deduction by double taxation of dividends, but such person may apply the Deduction of international double taxation in the terms provided for in Article 82 of Law 18/1991 of 6 June 1991 on the Income Tax of the Physical Persons in respect of taxes paid abroad corresponding to the income which has contributed to the formation of the received benefits. For these purposes, the first distributed profit shall be understood to be derived from income integrated in the tax base.

(c) Where the recipient is a natural person or a non-resident entity in Spanish territory, the distributed profit, where applicable from non-integrated income in the tax base, shall not be understood to be obtained in Spanish territory. For these purposes, the first benefit distributed shall be understood to be derived from non-integrated income in the tax base.

The provisions of this letter shall not apply when the recipient of the benefit resides in a country or territory that is regulated as a tax haven.

The entity that distributes the profit should mention in the memory the amount of the non-integrated income in the tax base and the taxes paid abroad corresponding to the same, and to facilitate its members the information necessary to enable them to comply with the provisions of the preceding letters. "

Additional disposition first. Legal system of the tax on revaluations carried out under the Royal Decree-Law 7/1996 of 7 June 1996 on measures of a fiscal nature and on the promotion and liberalisation of economic activity.

1. Taxable persons who carry out the updating provided for in Article 5 of Royal Decree-Law No 7/1996 of 7 June 1996 on measures of a fiscal nature and promoting and liberalising economic activity must satisfy a single charge of 3 by 100 on the credit balance of the account "Revalorisation Reserve Real Decree-Law 7/1996 of 7 June".

Dealing with natural persons who are not required to carry out accounting in accordance with the provisions of the Trade Code, the single charge will fall on the net increase in the value of the assets updated.

2. The taxable fact of the single charge, in the case of natural persons, shall be understood when the updated balance sheet referred to in Article 5 (3) of Royal Decree-Law No 7/1996 is drawn up and, in the case of legal persons, where is approved by the competent social body. The updated balance sheet shall be taken to mean the balance sheet of the annual accounts for the first financial year ending on 9 June 1996.

In the case of natural persons who are not required to keep accounts in accordance with the provisions of the Trade Code, the taxable event shall be deemed to have been carried out on 31 December 1996.

3. The single charge shall be payable on the day of the declaration relating to the tax period corresponding to the updated balance sheet.

The single charge shall be treated as a natural person on the day of the declaration for the year 1996.

4. The single charge shall be self-imposed and shall be entered in conjunction with the Company Tax declaration relating to the tax period to which the updated balance sheet corresponds, or to the Income Tax of the Physical Persons corresponding to the year 1996, within the legally established deadline.

The presentation of the out-of-time declaration will be an invalidating cause of the update operations.

5. The amount of the single charge shall not be taken into account in the consideration of the Company Tax or the Income Tax of the Physical Persons. Your amount will be charged to the "Real Decree-Law 7/1996 Revaluation Reserve, June 7," and will not have the consideration of fiscally deductible expense from the previously referred taxes.

6. The single charge shall be considered as a tax liability.

7. In the event of a minorisation of the balance of the account "Revalorisation reserve Royal Decree-law 7/1996 of 7 June 1996" as a result of the administrative check, the amount of the single charge corresponding to the balance shall be returned ex officio minorated.

The same rule applies in case of a minoron of the net increase in value, dealing with natural persons.

Additional provision second. Commercial consideration of participative loans.

Article 20 (d) of Royal Decree-Law No 7/1996 of 7 June 1996 on urgent measures of a fiscal nature and on the promotion and liberalisation of economic activity is worded as follows:

"(d) Participatory loans shall be considered as accounting assets for the purposes of reducing the capital and liquidation of companies provided for in commercial law."

Single transient arrangement. Transitional deduction scheme to avoid double taxation of dividends in corporate tax.

1. In the case of dividends and participations in profits from securities representative of capital or own funds acquired before the entry into force of Royal Decree-Law 8/1996 of 7 June, the restrictions shall not apply. the deduction to avoid the double taxation of dividends contained in Article 28 (4) of Law 43/1995 of 27 December 1995 on Corporate Tax. In this case, the restrictions contained in Article 28 of Law 43/1995, of 27 December, in its original wording, prior to the entry into force of Royal Decree-Law 8/1996, shall apply.

2. The income obtained in the transmission of the securities referred to in the preceding paragraph, made prior to the date of entry into force of Royal Decree-Law 8/1996 of 7 June, shall not be entitled to the deduction provided for in the Article 28 of Law 43/1995 of 27 December.

Single repeal provision.

Royal Decree-Law 8/1996 of 7 June is repealed and any provisions of equal or lower rank shall be contrary to the provisions of this Law.

Single end disposition.

This Law shall enter into force on the day following its publication in the "Official State Gazette".

Therefore,

I command all Spaniards, individuals and authorities, to keep and keep this Law.

Madrid, 18 December 1996.

JOHN CARLOS R.

The President of the Government,

JOSÉ MARÍA AZNAR LÓPEZ