Special tax regime of the Balearic Islands

The Seventieth Additional Provision of Law 31/2022, of December 23, on the General State Budget for the year 2023, creates the Reserve for investments in the Balearic Islands, with the purpose that taxpayers of the Corporate Tax and the Non-Resident Income Tax have the right to the reduction in the taxable base for the amounts that, in relation to their establishments located in the Balearic Islands, they allocate from their profits to the reserve for investments.

The reduction will be applied to the contributions that in each tax period are made to the reserve for investments up to the limit of 90 percent of the part of the profit obtained in the same period that is not subject to distribution, as far as it comes from establishments located in the Balearic Islands.

In no case may the application of the reduction determine that the tax base is negative.

Profits from establishments located in the Balearic Islands will be considered to be those derived from economic activities, including those from the transfer of assets related to them.

That is, profits from establishments located in the Balearic Islands will be considered those derived from operations carried out with the personal and material means assigned to it that close a commercial cycle that determines economic results .

Undistributed profits will be considered those used to build up reserves.

Allocations to reserves shall be deemed to be reduced by the amount that may have been deducted from equity, including cases resulting from the separation of partners or shareholders from the entity, either in the year to which the reduction in the tax base refers or in the year in which the agreement to make the aforementioned allocations was adopted.

For the determination of the undistributed profit and for the application of the percentage limit the same that may be allocated to the reserve for investments in the Balearic Islands the accounting result will be considered.

The following will not be considered undistributed profit:

1. The one intended to feed legal reserves.

2. That which derives from the transfer of assets whose acquisition would have determined the materialization of the reserve for investments in the Balearic Islands. However, in cases of transfer of assets that have only been partially used to materialize the reserve, the undistributed profit will be considered to be the proportional part of said profit that corresponds to the part of the acquisition value of the asset that would not have resulted in the materialization of the reserve.

3. That which derives from the securities representing participation in the capital or equity of other entities, as well as the transfer of equity to third parties.

The investment reserve must be shown on the balance sheets in a completely separate and appropriate manner and shall be unavailable as long as the assets in which it was materialized remain in the company.

The provision of this reserve will not be considered an increase in equity for the purposes of the provisions of section 2 of article 25 of Law 27/2014, of November 27, on Corporate Income Tax, nor will it serve to meet the requirement provided for in letter b) of section 1 of the aforementioned article 25, nor the requirement provided for in section 3 of article 105 of the same Law.

The amounts allocated to the reserve for investments in the Balearic Islands must be materialized within a maximum period of three years, counted from the date of accrual of the tax corresponding to the year in which it was provided, in the realization of any of the investments indicated in Law 31/2022.

Taxpayers may make advance investments, which will be considered as materialization of the investment reserve that is provided from profits obtained in the tax period in which the investment is made or in the three subsequent periods, provided that the remaining requirements demanded in the same are met.

The materialization and its financing system will be communicated jointly with the declaration of the Corporate Tax, the Non-Resident Income Tax or the Personal Income Tax of the tax period in which the advance investments are made .

The application of the benefit of the investment reserve will be incompatible , for the same assets and expenses, with the deductions to encourage the performance of certain activities regulated in Chapter IV of Title VI of the LIS . It will also be incompatible for the same goods and expenses with any tax benefit or measure of a different nature that has the status of state aid under European Union law, if said accumulation exceeds the limits established in the Community legislation that, in each case, are applicable.

The investment reserve must be realized within a maximum period of three years , counted from the date of accrual of the tax corresponding to the year in which it was provided, in the realization of any of the following investments :

• In the acquisition of or intangible fixed assets, assets that contribute to the improvement and protection of the environment in the territory of the Balearic Islands, as well as research and development expenses derived from research, development and technological innovation activities.

• The creation of jobs directly related to the investments planned in the previous section.

• The subscription of shares or participations in the capital issued by companies as a result of their incorporation or capital increase that carry out their activity in the archipelago, provided that certain requirements are met.

For the purposes of the investment reserve, tangible or intangible fixed assets shall be understood as those items referred to in the corresponding recording and valuation rules issued in development of the General Accounting Plan approved by Royal Decree 1514/2007, of November 16.

The assets may be new or used, provided that, in the case of the latter, said assets have not formed part, in their entirety, of the materialization of the reserve for investments in the Balearic Islands with respect to another taxpayer.

They must be located or received in the Balearic archipelago, used therein, affected by and necessary for the development of the taxpayer's economic activities, except in the case of those that contribute to the improvement and protection of the environment in the Balearic territory.

For this purpose shall be understood to be located and used in the archipelago:

1. Aircraft that, due to their destination, contribute to improving the connections of the Balearic Islands , under the terms determined by regulation.

2. Vessels flying the Spanish flag and with a home port in the Balearic Islands.

3. The transport and communications networks that connect the Balearic archipelago with the outside world, by the section thereof that is within the territory of the Balearic Islands and the part located outside of it that is used to connect the different islands of the archipelago with each other.

4. Computer applications and industrial property rights, which are not merely distinctive signs of the taxpayer or its products, and which are to be applied exclusively in production processes or commercial activities carried out within the Balearic territorial area, as well as intellectual property rights that are subject to reproduction and distribution exclusively within the Balearic archipelago.

5. Administrative concessions for the use of public domain assets located in the Balearic Islands, for the provision of public services that are carried out exclusively in the archipelago and for public works for the execution or operation of public infrastructures located in the Balearic Islands.

In the case of land, built or not, this must be affected :

• To the promotion of protected housing .

• For the development of industrial activities included in divisions 1 to 4 of the first section of the IAE rates.

• At socio-health activities , residential centers for the elderly, geriatric centers and neurological and physical rehabilitation centers.

• To the commercial areas that are subject to a rehabilitation process. 

• To the tourist activities regulated by Law 8/2012, of July 19, on Tourism in the Balearic Islands, the acquisition of which has the purpose of rehabilitating a tourist establishment. 

Commercial areas subject to a rehabilitation process shall be understood to be those urban shopping centres referred to in Law 11/2014, of October 15, on commerce in the Balearic Islands, and those municipal commercial promotion areas regulated in Law 6/2023, of March 16, on municipal commercial promotion areas of the Balearic Islands, affected by internal reform and urban regeneration actions in accordance with the corresponding urban planning instrument referred to in Law 12/2017, of December 29, on urban planning of the Balearic Islands.

The impact on the commercial area will be understood to refer to the centres, shopping galleries or business premises individually considered located in the area, including parking areas, common areas and equipment areas.

Rehabilitation works shall be considered to be actions aimed at the renovation, expansion or improvement of tourist establishments, provided that they meet the necessary conditions to be incorporated into tangible fixed assets as a higher value of the property in accordance with accounting regulations.

tourist activities shall be understood as those defined in article 3.b) of Law 8/2012, of July 19, on Tourism in the Balearic Islands and tourist establishments shall be those defined in article 3.h) of Law 8/2012. ##10008195####10008195##

For the purposes of the reserve for investments in the Balearic Islands, land used in any of the economic of the will be considered to be used for industrial activities when these are included in divisions 1 to of the first section of the rates of the Tax on Economic Activities, approved by Royal Legislative Decree 1175/1990, of September .

Considering in particular that such industrial activities are carried out in buildings, constructions and installations, as well as on covered or uncovered surfaces, which are used for the storage of raw materials, production and transportation elements, finished and semi-finished products, as well as administrative premises, those intended for the use of personnel and those intended for manufacturing activity, and those where the machinery, installations, and elements required or convenient for safety and hygiene at work are located.

The following will be considered investments in heritage elements that contribute to the improvement and protection of the environment in the territory of the Balearic Islands:

1. Those consisting of installations that prevent atmospheric or acoustic pollution from industrial installations, or against the pollution of surface, underground and marine waters, or for the reduction, recovery or treatment of own industrial waste, or to optimize the consumption and treatment of agricultural or industrial water resources, provided that the regulations in force in said areas of action are complied with and are carried out to improve the requirements established in said regulations.

2. Those made in tangible assets consisting of facilities and equipment intended for the use, for self-consumption, of renewable energy sources for their transformation into electricity.

In the case of intangible assets, the reservation may not be materialized in trademarks or non-patented know-how .

The following shall be considered non-patented technical know-how the rights for the economic exploitation of secret formulas or procedures, the rights over information relating to industrial, commercial or scientific experiences and the undisclosed set of technical information necessary for the industrial reproduction, directly and under the same conditions, of a product or a procedure.

derived from research, development and technological innovation activities referred to in article 35 of Law 27/2014, of November 27, on Corporate Income Tax, will be considered research and development expenses.

The materialization of the reserve for research, development and technological innovation expenses will not be conditioned on its subsequent activation and will be considered made as said expenses are accrued.

The reserve for investments in the Balearic Islands may be materialized in any type of transport element related to economic activity , whether for internal or external use, defining when it will be understood that a vehicle, a vessel intended for maritime passenger transport or elements of passenger transport by road are suitable for the materialization of the reserve for investments.

Thus, it will be understood that a vessel intended for the transport of passengers by sea is suitable for the materialization of the reserve for investments in the Balearic Islands when it is exclusively used to provide services that meet the needs of public service in the terms provided for in Law 11/2010, of November 2, on the regulation of maritime transport in the Balearic Islands.

The following will be eligible for the materialization of the reserve for investments in the Balearic Islands: investments in vehicles intended for the provision of land passenger transport services subject to concession or administrative authorization in accordance with the provisions of Law 4/2014, of June 20, on land transport and sustainable mobility in the Balearic Islands.

Finally, investments in road passenger transport elements will be eligible for the materialization of reservation provided that the company has its tax domicile in the territory of the Balearic Islands.

Investments in aircraft should contribute to improving the connections of the Balearic Islands .

to contribute to improving the connections of the Balearic Islands when more than fifty percent of their flights are intended to provide transport services between the islands of the Balearic archipelago or between these and other territories during the maintenance period of the investment

When this volume of flights is not reached, the reservation will be considered to have been materialized in the amount of the investment in the aircraft that corresponds to the percentage represented by the flights between the islands of the archipelago or between these and other territories with respect to the total of their flights during the investment maintenance period.

The administrative authorisation for the circulation of tourist vehicles intended for vehicle rental with or without driver and, in general, for all vehicles subject to the Tax on Mechanical Traction Vehicles must include an address corresponding to a municipality in the Balearic Islands . Likewise, when vehicles do not require administrative authorisation for their circulation because they are intended for internal use in the company's facilities, they will be required to be intended for use in establishments located in the Balearic Islands.

In all cases, it will be required that the vessels be with a Spanish flag and with a home port in the Balearic Islands.

1. To the leases of protected housing by the entity promoting them. The homes must be leased for at least five uninterrupted years .

2. To the tourist activities referred to in Law 8/2012, of July 19, on Tourism in the Balearic Islands.

3. For the development of the industrial activities included in divisions 1 to 4 of the first section of the rates of the Tax on Economic Activities, approved by Royal Decree 1175/1990, of September 28.

4. At social-health activities , residential centers for the elderly, geriatric centers and neurological and physical rehabilitation centers. Pharmacies are understood to constitute social-health activities.

5. To the development of activities in commercial zones located in areas where the tourist offer is in decline. The area whose tourist offer is in decline shall be understood as the saturated or mature tourist areas declared as such in accordance with Law 8/2012, of July 19, on Tourism in the Balearic Islands.

You must meet the following requirements:

• The creation of jobs must be directly related to investments in the acquisition of tangible or intangible fixed assets, in assets that contribute to the improvement and protection of the environment in the territory of the Balearic Islands, as well as in research and development expenses derived from research, development and technological innovation activities.

• must be produced within a period of six months from the date of entry into operation of said investments.

• The creation of jobs will be determined by the increase in the taxpayer's total average workforce produced in said period with respect to the average workforce of the 12 months prior to the date the investment comes into operation, provided that said increase is maintained for a period of five years, except in the case of taxpayers who meet the conditions of article 101 of Law 27/2014, of November 27, on Corporate Tax, in the tax period in which the profit from which the reserve is provided is obtained, who must maintain said increase for three years. To calculate the company's total average workforce and its increase, the number of people employed will be taken into account, in accordance with the terms established by labour legislation, taking into account the contracted working hours in relation to the full working day. The creation of jobs and the changes in average workforce will be those produced in all the taxpayer's establishments located in the Balearic Islands.

The reservation may be materialized in the subscription of shares or participations in the capital issued by companies as a result of their incorporation or capital increase that carry out their activity in the archipelago, provided that the following requirements are met:

• The issuing entities will make investments in the acquisition of tangible or intangible fixed assets, assets that contribute to the improvement and protection of the environment in the territory of the Balearic Islands, in research and development expenses derived from research, development and technological innovation activities, as well as in the creation of jobs directly related to the indicated investments.

• Issuing entities must make the investments indicated in the previous point within three years from the date of accrual of the tax corresponding to the year in which the subscribing entity had provided the reserve.

• The acquired heritage elements must remain in operation in the Balearic Islands.

• The amount of the acquisition value of the investments made by the issuing company must reach, at least, the amount paid for the shares or participations by the subscribing entity. Otherwise, the reduction of the tax base will be proportional to the investment made.

• The investments made by the issuing company will not give rise to the application of any other tax benefit.