The Corporate, Individual and Non-residents Income Tax Bill, as approved by the government, have been submitted to the parliament for discussion. The amendments are expected to be approved in 2006 and enter into force as from 1 January 2007. The most significant changes in the Bill are summarized below. All amounts are in euro.

Corporate income tax

(a) Tax credits. Most tax credits (except those for domestic and international double taxation) would be gradually reduced until they are eliminated in the 2011-2013 period. The reduction will proceed at different paces, depending on the credits concerned.

(b) Incentive for investments abroad. As from 1 January 2007, the annual tax credit of 25% of the amount invested to establish a foreign branch, to purchase a substantial shareholding of a foreign company, or to explore or penetrate new markets, would be abolished. The European Commission has formally requested Spain, under the EC Treaty state aid rules, to eliminate this tax incentive.

(c) R&D tax credit. This credit would be gradually reduced until it is abolished in 1 January 2012. However, the government would be authorized to introduce an optional 40% allowance against payments to the social security of R&D employees, which would be maintained after 2012.

(d) Cultural investment credit. This credit would be gradually reduced between 2007 and 2013 until it is abolished in 2014.

Withholding taxes

Withholding taxes and payments on account would be generally increased to 18% (from 15%).

Withholding tax on income derived from the use or exploitation of image rights would be increased to 24% (from 20%).

Non-residents income tax

(a) Tax rate permanent establishments. In line with the the pace of the reduction in corporate income tax rates, the tax rate applicable to PEs is reduced gradually by one percentage point per year from 2007 to 2011. Therefore, the current 35% tax rate would be phased out to 30% in 2011. For PEs engaged in oil and gas E&P activities, the tax rate would be gradually reduced from the current 40% to 35% in 2011.

(b) Branch profit tax. The branch profit tax would be increased to 18% (from 15%).

(c) General withholding tax. The general withholding tax applicable to income derived by non-residents would be reduced to 24% (from 25%). This rate of 24% would match the minimum marginal rate applicable to resident individuals.

(d) Capital gains. To bring into line with EU law, the applicable tax rate applicable to capital gains of non-residents would be reduced to 18% (from 35%).

(d) Dividends and interest. The withholding tax rate applicable to dividends and interest would be increased to 18% (from 15%).

(e) Transfer of real estate. The special immovable property tax applicable to the transfer of real estate situated in Spain by non-residents would be reduced to 3% (from 5%). This tax is deducted by the purchaser from the sale price on account of the final tax liability of the non-resident seller.