INCOME OBTAINED IN SPAIN AND EXEMPTIONS

Serapeum

Non-resident individuals and bodies corporate shall be subject to Non-Resident Income Tax (IRNR) depending on the extent to which their income is obtained in Spain.

INCOME OBTAINED IN SPAIN

Until recently, there were two criteria for determining whether income was generated in Spain: source of income and payment by a resident. However, in accordance with Spanish tax regulations in force as from 1 January 2003, the criterion of payment shall only be applicable to income where expressly stipulated. The criteria according to which each type of income is deemed to be obtained in Spain are as follows:

Income from economic activities

• Activities carried out by means of a permanent establishment (PE) in Spain.

• Activities not carried out by means of an PE in Spain when:

- They are a consequence of economic activities carried out in Spain, except for income deriving from the installation or assembly of machinery or equipment supplied from abroad, when the installation or assembly operations are performed by the supplier and the corresponding amount does not exceed 20% of the purchase price. Nevertheless, income obtained from international purchases and sales of merchandise, including auxiliary expenses and mediation royalties, shall not be deemed to be income obtained in Spain.

- They consist used in Spain. When only part of these services are rendered TO economic activities carried out in Spain, only the income obtained from that part shall be deemed to be generated in Spain.

- They are derived from the personal performance in Spain of artists and sportspeople, even if payment is received by another individual or body corporate.

Income from dependent personal services

• In general, earned income derived from activities carried out by an individual in Spain.
• Income paid by the Spanish administration, except when the work is entirely carried out abroad and is subject to personal income tax in another country.
• Income earned by employees of ships and aircraft involved in international trade when paid by resident employers or bodies corporate or by PEs located in Spain, except when the work is entirely carried out abroad and is subject to personal income tax in another country.

Pensions and similar benefits

• When derived from work carried out in Spain.
• When paid by resident individuals or bodies corporate or PEs located in Spain.

Income of managers and members of boards of directors (or other bodies that perform the same function) and representative bodies

• When paid by a resident body corporate. Income from Dividends, Interests, Royalties
and other fees
• Dividends and other income from participation in the equity of resident bodies corporate.
• Interest and other income from third-party loans paid by resident individuals or bodies corporate
or PEs located in Spain, or interest and other income from loans of capital used in Spain.
• Royalties received from resident individuals or bodies corporate or PEs that are located in Spain, or royalties that are used in Spain.
• Other income from capital not mentioned above and received from individuals in the performance of that individual's economic activities, or from resident bodies corporate or from PEs located in Spain.

2. INCOME OBTAINED IN SPAIN AND EXEMPTIONS

Income from real-estate property

• Income derived directly or indirectly from real-estate property located in Spain or from real rights derived therefrom.

Income attributable to individuals who own urban real estate not used for economic activities

• Income from real-estate property located in Spain.

Capital gains

• Capital gains from investments in securities issued by resident individuals or bodies corporate.
• Capital gains from moveable property located in Spain or rights realizable in Spain.
• Capital gains from real-estate property located in Spain.
• Capital gains from assets located in Spain or rights realizable or practicable in Spain, including gains not derived from prior transfers, such as gambling winnings.

The following exception applies to all types of income:

Income paid to non-resident individuals or bodies corporate by and for the account of an PE located
abroad is not deemed to be earned in Spain when the services rendered are directly linked to the PE's
activities abroad.

EXEMPTIONS

The following income, among others, obtained by non-residents without an PE is not subject to IRNR:

Income which, in accordance with IRPF regulations, is exempt from income tax when earned by an
individual, such as:
Grants
As from 1 January 2004, all grants for officially recognized studies in Spain or abroad, at any level or stage of the educational system, are exempt from income tax when awarded by the Spanish public authorities or non-profit organizations to which the special system regulated under Title II of Law 49 of 23 December 2002 on the tax system for non-profit organizations and sponsorship tax incentives is applicable.
Also exempt are any grants awarded by the Spanish public authorities or the aforementioned nonprofit
organizations for research within the scope of Royal Decree 1326 of 24 October 2003, which approved the Statute for Research Grantholders, and research grants awarded by said non-profit organizations to civil servants and other personnel at the service of the public administrations as well as university teaching and research personnel.

Until 31 December 2003, public grants for studies at any level or stage of the educational system were exempt from income tax, up to and including the undergraduate universitydegree level or equivalent.

Pensions

Pensions recognized by the Spanish Social Security as a consequence of permanent disability for any job or total invalidism, or by the Civil- Servant Pension Scheme as a consequence of loss of fitness for work or permanent disability.

Winnings from lotteries, bets and draws Winnings from lotteries and bets organized by the public organization “Loterías y Apuestas del Estado” and the Autonomous Communities of Spain, as well as draws organized by the Spanish Red Cross and the Spanish National Organization for the Blind (ONCE).

Old-age pension benefits recognized in accordance with Royal Decree 728 of 14 May 1993, which establishes old-age pension benefits for Spanish emigrants.

Interest and capital gains from moveable property when obtained by residents in other European Union (EU) Member States or by said residents' PEs in other EU Member States, except when:
• Interest and/or capital gains are obtained through a tax haven (Appendix III).
• Capital gains are derived from the transfer of shares, stakes or other rights in a body corporate,
in whose share capital or equity the taxpayer has directly or indirectly held at least a 25% stake during the 12 months prior to said transfer.
• Capital gains are derived from the transfer of shares, stakes or other rights in a body corporate,
in whose share capital or equity the taxpayer has directly or indirectly held at least a 25% stake during the 12 months prior to said transfer.
Yields from investments in public-debt securities, except when obtained through a tax haven (Appendix III).
Yields and capital gains from securities issued in Spain by non-residents.
Yields of non-residents' bank accounts. With the exclusive aim of proving exemption from the withholding tax obligation on non-residents' bank accounts, IRNR taxpayers may provide the corresponding financial institution with a certificate issued by the tax authorities in the country of residence or a statement declaring they have tax residence in another country; said statement shall follow the model included as Appendix VI to the Order of 9 December 1999, which approved Forms 216 and 296.
The Bank of Spain and the registered institutions referred to in the regulations on foreign economic
transactions at which non-residents' hold accounts are obliged to present Form 291 (Non-Resident
Income Tax. Declaration for Information Purposes of Yields of Non-Residents' Accounts) to provide
the Spanish tax authorities with data on said accounts.

Earnings distributed by resident subsidiaries in Spain to their parent companies that are
residents of other EU Member States, provided certain conditions are met.
A parent company is one that holds a direct stake of at least 25% in another company. The company
in which the stake is held is the subsidiary. This exemption shall be applicable provided the parent
company is not a resident of a country or territory classified as a tax haven (Appendix III).
Income from transfers of securities or sales of shares in investment funds carried out on official
secondary securities markets in Spain and obtained by individuals or bodies corporate that are residents of a country with which Spain has signed an agreement that includes a dataexchange
clause, provided said income is not obtained through a tax haven (Appendix III).

Grants and other sums paid to individuals by the public administration by virtue of international
agreements on cultural, educational and scientific cooperation or the Annual Plan for International
Cooperation approved by the Spanish Cabinet.

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