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Practical manual for Income Tax 2020.

b) Requirements for the application of the deduction

Regulations: Art. 27, sections 3 to 14 and eighth transitional provision of Law 19/1994, of July 6, amending the Economic and Fiscal Regime of the Canary Islands

To apply this deduction, the following requirements must be met:

  • That the taxpayer determines the net income from its economic activity in accordance with the direct estimation method and that said income comes from activities carried out through establishments located in the Canary Islands.
  • That the Investment Reserve is accounted for separately , and that it is not used as long as the assets in which it has been materialized must remain in the company.

  • That the amounts allocated to said reserve materialize within a maximum period of three years , counted from the date of accrual of the tax corresponding to the year in which it was allocated, except in the case of allocations with profits obtained in tax periods beginning in 2016, which is extended by one more year (to four years).

    New: Due to the serious effects that the pandemic has had on investments and economic results in 2020, Royal Decree-Law 39/2020, of December 29, on financial measures for social and economic support and compliance with the execution of judgments, introduces a new eighth transitional provision in Law 19/1994, of July 6, modifying the Economic and Fiscal Regime of the Canary Islands, to extend this period established in article 27.4 of Law 19/1994 by one more year for investments in the Canary Islands endowed with profits obtained in tax periods beginning in 2016.

  • That said materialization takes place in the realization of any of the investments detailed in article 27.4 of Law 19/1994 ( BOE of 30).

    The investments detailed in article 27.4 of Law 19/1994 are examined in its specific section " Investments where the amounts allocated to the RIC must be materialized" of this Chapter

  • That the assets in which the investment is materialized are located or received in the Canary Islands, that they are used therein, that they are affected by and are necessary for the development of the economic activities of the taxpayer, except in the case of those that contribute to the improvement and protection of the Canary Islands environment. Investments detailed in article 27.4 of Law 19/1994.

    Article 27.5 of Law 19/1994 determines for this purpose which elements will be understood to be located and used in the archipelago.

  • That the assets in which the reserve for related investments in letters A and C of article 27.4 of Law 29/1994 has been materialized, as well as those acquired pursuant to the provisions of letter D of the aforementioned section 4 of article 27, remain in operation in the company of the same taxpayer for at least five years , without being transferred, leased or assigned to third parties for their use. When its permanence is less than said period, this requirement will not be considered breached when another asset is acquired to replace it at its net book value, prior to or within 6 months of its removal from the balance sheet, which meets the requirements for the application of the deduction and which remains in operation for the time necessary to complete said period. In the case of land acquisition, the period will be ten years.

    Taxpayers engaged in the economic activity of leasing or transferring fixed assets to third parties for their use may benefit from the investment reserve, provided that there is no direct or indirect link with the lessees or transferees of said assets, in the terms defined in article 18.2 of Law 27/2014, of November 27, on Corporate Tax, nor are they financial leasing operations.

    In the case of leasing real estate, in addition to the conditions provided for in the previous paragraph, the requirements established in the fourth paragraph of section 8 of article 27 of the aforementioned Law 19/1994, of July 6, must be met.

    For the purposes of calculating the maintenance period, it must be taken into account that, for the investments of article 27.4. A) and C), materialization will be deemed to have occurred, even in cases of acquisition through financial leasing, at the time when the assets come into operation.

Note: the sole article.One of Royal Decree-Law 15/2014, of December 19, modifying the Economic and Fiscal Regime of the Canary Islands ( BOE of 20) repealed section 10 of article 27 of Law 19/1994, so it is no longer necessary for the taxpayer to submit electronically the investment plan within the tax declaration deadlines in which the deduction corresponding to the reserve for investments in the Canary Islands is made and through the form that appeared on the page of the State Agency of Tax Administration on the Internet

Non-compliance with requirements

Regulations: Art. 27.16 Law 19/1994, of July 6, amending the Economic and Fiscal Regime of the Canary Islands

The provision of the investment reserve prior to the end of the investment maintenance period or for investments other than those provided for in section 4 of this article, as well as the failure to comply with any other requirements established in this article, except the requirement for its separate accounting and the information on the RIC that must be included in the annual accounts report, will result in the taxpayer proceeding to integrate, in the personal income tax base of the year in which these circumstances occurred, the amounts that at the time gave rise to the reduction of the former or the deduction of the latter, without prejudice to any applicable penalties.

In the event of non-compliance with the obligation to exercise the purchase option provided for in financial leasing contracts, the integration into the tax base will take place in the year in which it was contractually provided that it should have been exercised.

Late payment interest will be settled in accordance with the terms provided for in Law 58/2003 and its implementing regulations.