EXPLANATORY STATEMENT

The present Royal Decree-law addresses a question of broad significance in the Company Tax, namely the treatment of dividends and capital gains relating to securities representing the equity of capital legal entities resident 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 first moment in which it manifests itself, establishing a perfect correlation between income integration in the tax base and the 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 in 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 method of imputation continues to apply to those taxable persons who so wish or who do not comply with the requirements laid down 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 to enjoy the method of exemption.

The government, in the face of the exceptional challenge arising from the need to meet the demands of the Community's economic policy, has adopted a package of measures among which is the present Royal Decree-Law. The concurrence of an urgent and extraordinary need is justified by the deadline for accessing the third stage of monetary union. This requires an immense effort in which not only the State but the society as a whole must participate, so the objective must be taken from all possible fronts.

In its virtue, on the proposal of the Second Vice President of the Government and Minister of Economy and Finance and in use of the authorization contained in Article 86 of the Constitution, after deliberation by the Council of Ministers at its meeting of 7 June 1996,

D I S P O N G O:

Article 1. Deduction for double 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: Dividends and internal source 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 holdings in profits.

The tax base derived from dividends or shares 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 and indirectly in at least 5 per 100, provided that such participation is 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 welfare institutions, mutual guarantee societies and associations.

3. The deduction shall also apply in the case of the settlement of companies, the separation of members, the acquisition of shares or units of their own for redemption and dissolution without liquidation in merger, total division or the total disposal of the assets and liabilities in respect of the calculated income derived from those transactions, in the part corresponding to the non-distributed profits.

The deduction will also be made on the income that the company that performs the transactions referred to in the preceding paragraph must integrate into the tax base in accordance with the provisions of Article 15.3 of this Law.

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

:

(a) Those arising from the reduction of the capital or the distribution of the premium for shares/units.

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

c) Those distributed by the public-character 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.

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, it shall be deducted from the (a) full quota of the tax rate for the net increase of the undistributed profits, with the limit of the income computed, generated by the entity involved during the holding time of the share transmitted, provided that 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 preceding the day on which 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 cannot be determined, the securities shall be presumed to have been acquired for their value theoretical.

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 paragraph.

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

Article 2. Foreign source dividends and capital gains.

An article is added, with the number 30a, to Law 43/1995, of December 27, of the Corporation Tax, with the following content:

" Article 30a. Deduction to avoid international economic 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 shares 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, with the limit of the calculated income, generated by the entity involved during the time of the holding of the Participation transmitted.

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 and 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 to the day on which the transmission occurs.

b) That the participating entity is subject and not exempt from a tax of characteristics comparable to this Tax and does not reside in a country or territory that is regulated as a tax haven. Regulations may establish relationships of entities that are subject to a tax that is not comparable to this tax.

(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 in a country 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 laid down in points (b) and (c) shall be met in each and every holding of the holding, 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 121 (2) of this Law, the provisions of that Article 121 shall apply in respect of the In accordance with Article 4 (1) of the Rules of procedure, the Commission shall take into account the provisions of this Article.

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 purpose 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 applies in respect of the deduction provided for in paragraph 2.

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. "

Article 3. Arrangements for the holding of foreign securities.

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 Trade Code.

(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 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 and indirect participation, more 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 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 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 participating entity.

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 related to 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 the depreciation is shown, except that the amount of the abovementioned benefits has been taxed in Spain on the occasion of a previous transfer 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 stake.

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 In accordance with Article 4 (1) of the Rules of procedure, the Commission shall take into account the provisions of this Article.

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 must be integrated into the tax base. In the event that the income of the income provided for in Article 121 (2) of this Law is co-existed with income for which the income is to be distributed to it as laid down in this Article, the provisions of this Article shall be met. social agreement for the purpose 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. "

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 by double taxation of dividends, but such a beneficiary may apply the double taxation deduction (a) in accordance with 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.

(b) When the recipient of the profits is a person subject to the Income Tax of the Physical Persons, the distributed profit shall not entitle the deduction for double taxation of dividends.

(c) When the recipient is a natural person or entity not resident in Spanish territory, the amount paid abroad by reason of the dividends or income arising from the transfer of the holding shall be deductible from the fee payable as a real obligation to contribute to this tax.

For the purposes of this Article, the first distributed profits shall be understood to be derived from income integrated in the tax base.

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

Final disposition.

This Royal Decree-law will enter into force the day after its publication in the "Official State Gazette".

Given in Madrid on June 7, 1996.

JOHN CARLOS R.

The President of the Government,

JOSÉ MARÍA AZNAR LÓPEZ