Spain: Re-establishes Rules on Applying Reduction on Stock Option Income
Spain’s Sustainable Economy Law 2/2011 (Ley 2/2011 de Economía Sostenible1) was published in the official gazette (Boletín Oficial del Estado) on 5 March 2011, following its approval on 4 March. This Law re-establishes, with retroactive effect, a rule requiring that in order to apply the 40-percent reduction on irregular income derived from stock options, these options must not be granted annually.
Spain’s Personal Income Tax (PIT) Law establishes a 40-percent reduction for non-regular income. Non-regular income is defined as income generated over a period of more than two years and not obtained on a periodical or recurrent basis – and, so, able to benefit from a 40-percent reduction. Spanish PIT Regulations specifically stated that stock option income would qualify as non-regular income provided that:
(1) more than two years have lapsed between the granting and the exercise of the options, and
(2) the options were not granted annually.
However, the Supreme Court (Tribunal Supremo) considered the illegality of article 10.3 of the previous PIT regulation (under Royal Decree 1975/2008) – the current article 11.3 – and issued an important ruling on 30 April 2009, pronouncing on the illegal nature of the requirement (no. 2 above) set forth in the PIT Regulations, so that income so earned could therefore qualify for the reduction
In its first decision, the Supreme Court provided that those stock options that were exercised after a period of more than two years from granting could indeed apply the
40-percent reduction on irregular income whether a holding period was imposed on the option-holder or not.
Subsequently, as indicated above, the Supreme Court declared illegal the additional requirement set out by Royal Decree 1975/2008, which stated that the application of the aforementioned reduction required that options could not be granted annually.
New Situation under Provisions of Sustainable Economy Law 2/2011
The Sustainable Economy Law 2/2011 adds a 31st “additional provision” to the PIT Law (35/2006) to establish by law that in order to apply the 40-percent reduction on irregular income deriving from stock options, the options must not be granted annually.
In light of the above, it is important to note that the current amendment of the rules on the application of the 40-percent reduction on irregular income derived from stock options has been implemented by law rather than by regulation, and, therefore, there is a legal mandate which would preclude further regulatory modifications.