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TAXATIONIn generalThe Spanish tax system is composed of direct and indirect taxes. Direct taxes include corporatetax, income tax, non-resident income tax, inheritance and donation tax, and local taxes. Indirecttaxes include value-added tax (VAT), wealth transfer and legal documented acts, custom dutiesand special taxes.Corporate Income TaxIn generalLegislative Royal Decree 2 of 5 March 2004, by which the Corporate Income Tax Law wasapproved, and implemented by the Royal Decree 1777/2004, represented a major reform ofcorporate taxation in Spain. Its main objectives are harmonisation of rules for determining thetax base and accounting rules and the systemization of existing legislation.The key factor in determining the application of corporate income tax is the “residence”. Acompany is deemed to be resident in Spain for tax purposes if it meets any of the followingconditions:- It is incorporated under Spanish law.- Its registered office is located in Spain.- Its effective management headquarters are in Spain.In the event of a conflict of residence, the provisions of Spain’s tax treaties with other countrieswill, where applicable, prevail.Resident companies are taxed on their worldwide income. Taxable income includes all the profitsfrom business activities, income from investments not relating to the regular business purpose,and income derived from asset transfers.In this connection, Spain’s tax treaties with other countries, where applicable, may influence thedetermination of the tax base for taxation in Spain. Taxation of non-resident entities is regulatedseparately under the Income Tax Act for Non-Residents.Taxable incomeTaxable income is the company’s gross income for the tax year, less certain deductions. It isdetermined from the annual financial statements prepared under Spanish generally acceptedaccounting principles as adjusted for certain statutory tax provisions.In general, all necessary expenses incurred in producing income during the year and depreciationon income-producing property may be deducted from gross income to arrive at taxable income.Certain items are not deductible from gross income, such as the following:22