In November 2006 the reform of the Personal Income Tax (IRPF) has been approved, coming into force on the 1st January 2007.

New aspects for individuals:

1. Earned income taxes are reduced (employees, public officers, etc....)

2. Rate brackets are also reduced (from 5 to 4) and the maximum marginal rate (decreases from 45% to 43%). The minimum rate being 24%

3. The individual minimum amount to be applied for obtaining tax reductions is increased in almost 50%; individual minimum amounts per child are increased between 20% and 30%, while minimums for handicapped people are increased between 13 and 38%.

4. SAVINGS. Taxation of 18% for all kinds of savings products (interests, dividends, capital gains, assurances, etc.) Interests received by the partner of any company will be taxed at 18%. The current law on /IRPF /establishes that capital gains obtained through assets which have been acquired before the 31st December 1994 are exempted from tax payments. From 2007 this will change and all earnings obtained from such date will be taxed at 18%. But there is something curious. The law establish a transitional period so from the 20th January 2006 until 31st December 2006, these capital gains will be taxed at 15%. For example, let us imagine that before 1995 someone bought shares for a value of 1,000 euros.

On the 20th of January 2006 these shares were valued at 11,000 euros. In September 2006 you decide to sell your shares for 12,000 euros. You could think that your earnings would be tax free, but with this new law, whichever you may have warned from the 20th of January (1,000 euros) will be taxed at 15% (you would have to pay 150 euros). Let us now imagine the same case but, instead of selling your shares in September 2006, you decide to sell them in September 2007. On the 31st December 2006, these shares are valued at 12,500 and in September 2007 you sell them for 14,000 euros. You would have to pay 15% of the earnings obtained between the 20th of January and the 31st of December 2006 (1,500 euros) to the Public Tax Administration (which is 225 euros). And also, you would have to pay 18% (270 euros) for the earnings obtained in 2007 (1500 euros). This is also applicable to real properties.

5. REAL ESTATE PURCHASES. The new IRPF establishes a deduction of 15% of the acquisition value, with a maximum allowance of 9015 euros per year. WHAT’S NEW FOR COMPANIES Spain seeks to equal Europe in tax rates. For big companies the current rate of 35% is decreased to 30%, although this reduction will not enter into effect until 2008, since in 2007 the rate will remain in an intermediate 32,5%. There will be a substantial decrease in the Companies tax, from 30% to 25% for middle and small companies (PYMES) . There will also be a suppression of almost all current deductions. Regarding the distribution of dividends to shareholders who are not companies but individuals, in 2007, the first 1,500 euros from these dividends will not be subject to taxes and, whatever excess, will be taxed at 18%.

Loans given by individual shareholders to companies in 2007 will be compulsory valued at their market price, which means interests will be integrated in the shareholder’s IRPF, being this taxed at the general percentage. Therefore, in certain cases it is advisable to cancel these loans.

It is a good idea to transfer your earnings, if possible, from 2006 to 2007 and so your expenses, paying them in advance from 2007 to 2006, so you can take advantage of the tax rate reductions. For Companies which, at the first fiscal year started in the 1st of January 2005 were not property companies but they have become one of these alter such year, or property companies which are no longer of that kind from such fiscal year and later on – in a different fiscal year- they become property companies again, these will not be entitled to make use of the temporary state of liquidation, and therefore, from the fiscal year started on the 1st of January 2007, these companies shall be subject to the General System taxes.

In this case, these companies should study whether it would be good for them, from a fiscal point of view, to sell some properties while they continue being property companies so they can take advantage of the rate at 15%, instead of applying the rates of 25, 30 or 32,5% corresponding to the general regime or the small companies.

For property companies which are entitled to make use of the temporary state for liquidation, the transfer of certain elements in 2006 or in 2007 while the agreement is being taken and while the required actions of recorded release are being performed, they can obtain a taxation of 15% for their earnings. If these assets are sold and transferred by the shareholders, the capital gain will be taxed at 18% for individual shareholders and at 25, 30 or 32,5% for companies.