Important tax incentives in the Balearic Islands for branches, Spanish companies and self-employed persons

On 24 December last year, Law 31/2022 was published with the new special regime for the Balearic Islands, also known as REIB, which recognises insularity through special tax measures and came into force on 1 January. It will apply until 31 December 2028, with the possibility of extension.
This scheme is divided into two measures: the Reserve for Investments in the Balearic Islands and the Special Regime for Industrial, Agricultural, Livestock and Fishing Enterprises.
The measures have a positive impact on corporate income tax (IS) and non-resident income tax (IRNR) taxpayers, as they can benefit from a reduction of up to 90% of the tax base of their respective taxes, provided they derive from economic activities in the Balearic Islands, including those derived from the transfer of assets.

In order to benefit from the tax incentives, they must create a reserve, which must be created within three years and must be allocated to one of the following investments:
– Acquisition of tangible or intangible fixed assets that contribute to the improvement and protection of the environment, or expenditure on innovation and development.
– Creation of employment within a period of six months from the date of implementation of the investment.
– Acquisition of participations or shares issued by newly established companies or companies with an increase in capital that carry out the activities referred to in the first point.

Taxpayers resident in the Balearic Islands who carry out a normal activity with direct assessment may make a deduction of up to 80% of the part of the gross tax liability attributable to net income. For this purpose, the self-employed must keep accounts in accordance with the provisions of the Commercial Code and their income must derive from economic activities in establishments located in the Balearic Islands.
The tangible assets acquired must be in use for a period of 5 years and must be necessary for the development of economic activity in the territory of the Balearic Islands. The acquisition through leasing is also considered as realisation of the reserve. It should be noted that the investments made do not entail any other tax benefits.

As for the special regime for industrial, agricultural, livestock and fisheries businesses, they are entitled to a reduction of 10% on the part of the gross tax liability corresponding to the income generated by the production of their activities, with the possibility of increasing this reduction to 25% in periods in which the average number of employees has increased in the previous positive period and this increase has been maintained over a period of three years. Self-employed persons also benefit from this allowance, provided that their net income is determined using the direct estimation method and derives from the aforementioned production activities.

In conclusion, the new Balearic tax regime seems to offer a new opportunity to reduce the tax burden for taxpayers operating in the Balearic Islands, but we believe that a prior analysis of the investments to be made is advisable in order to avoid not meeting the requirements.

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