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Spanish Supreme Court further widens tax benefits on stock options


Under Spanish legislation, income tax and the withholding tax mechanism are not triggered in respect of non-transferable stock options over shares granted by employers and their group companies until their effective exercise.

The taxable income can benefit from a reduction of 40%, resulting in being taxed only on 60% of income derived from any such exercise, provided that the following requirements are met: (a) the income should be "long-term income", which is income generated over a period of at least two years (between the grant date and the date of exercise of the option); and (b)the income is not obtained on a recurrent or regular basis.

The current Personal Income Tax Regulations, which further developed under article 11.3 the requirements set out in the Personal Income Tax Law, imposed two additional requirements that should be met in order for the 40% reduction to apply to income obtained from the exercise of the options:

(i) the options can be exercised only after a two-year period since the grant date; and

(ii) the options cannot be granted on an annual basis.

In a decision dated 9 July 2008, the Spanish Supreme Court declared null and void the part of article 11.3 which imposed the condition included in (i) above, as it considered that the Income Tax Regulations included a limitation or condition which was not required by the Income Tax Law, and Regulations cannot go beyond the requirements imposed by a law.

Now, in a new court decision dated 30 April 2009 which has only very recently been published, the Spanish Supreme Court has decided that the part of article 11.3 of the Income Tax Regulations which imposes the condition included in (ii) above should also be declared null and void, on the basis that such requirement also exceeds the provisions of the law.

Therefore, regardless the periodicity of the granting of the options, employees will be entitled to the 40% reduction provided that the income is "long-term income" and is not obtained on a recurrent or regular basis.




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