Ceuta and Melilla Online Gaming Activities Tax Report

About Corporate Income Tax in Ceuta

LIS. Art. 33 ? A 50% rebate is available for the part of the total tax liability corresponding to income obtained by entities that effectively and materially operate in Ceuta or Melilla.

Spanish entities with tax domicile in:

1. a) Ceuta and Melilla. That is to say, the entity has its registered office in Ceuta or Melilla and the administrative management and management of the entity’s business is effectively centralized there.
2. b) The rest of the Spanish territory operating in Ceuta and Melilla by means of a permanent establishment or branch, and will be given when:

1. There is a place in those territories where all or part of the economic activity is carried out, and it can be carried out on a fixed or seasonal basis.
2. It acts in those territories through an agent authorized to contract, in the name and on behalf of the taxpayer, who habitually exercises such powers.
3. There are management offices, branches and offices.

• If all the activity is carried out in those territories: all your income is tax deductible.
• f part of the activity is carried out in those territories and part outside them, but without determining the existence of permanent establishments outside Ceuta and Melilla: all the income is also tax deductible. However, each case should be assessed on a case-by-case basis: specific question of the means used to provide it that have at least one point of connection with Ceuta and Melilla.
• Part of the activity is carried out in those territories and another part outside them, determining the existence of permanent establishments outside Ceuta and Melilla: only the part of the income attributable to the activity carried out in Ceuta is subsidized.

Important: well-defined corporate purpose.

Non-resident entities in Spain that operate in Ceuta and Melilla through a permanent establishment. In this case, in order to assess the existence of a permanent establishment, the provisions of the agreement to avoid double international taxation between Italy and Spain must be followed (art. 5).

• All the activity is carried out in those territories through permanent establishments: all the income is tax deductible.
• Part of the activity is carried out in those territories determining the existence of permanent establishments in Ceuta and Melilla: only the part of the income attributable to the activity carried out in Ceuta and Melilla is tax deductible.

The above tax credit applies to those entities that close in those territories a business cycle that determines economic results. A business cycle is closed in the territories of Ceuta and Melilla when the following conditions are met:

1. There must exist in these territories a business organization, in the sense that there are available in them material and personal means necessary to develop an economic activity ? LIS art. 5.1
2. The result of such activity must consist in the production of goods and services for third parties.
3. The economic activity carried out in those territories must generate income.

Regarding income received outside the territory of CEUTA

Spanish entities domiciled for tax purposes in Ceuta and having their effective place of management in those territories, as well as foreign entities not resident in Spain and operating in those territories through a permanent establishment, provided that all those entities have effectively and materially operated in Ceuta or Melilla for a period of not less than three years, may apply the tax credit for income obtained outside those cities in the tax periods ending after that three-year period has elapsed. In order to apply the tax credit, at least half of their assets must be located in those territories.

The maximum amount of income entitled to this extended tax credit is the income obtained in Ceuta.

Regarding the transactions:

• If the transactions are carried out with entities outside the group, the amount of the rebate coincides with the amount that would have resulted under the individual taxation regime, i.e., the amount resulting from applying the 50% reduction to the product of the tax rate of the parent company for the income obtained in those territories.
• If the transactions are carried out between group entities, to the extent that such income is subject to elimination at group level, as there is no gross tax payable on such income, no tax credit is applicable, being effective when the income is considered to be obtained by the group, i.e. in the tax period in which it is included in the taxable income of the group according to the rules on accounting consolidation, at which time the tax credit will be applicable.

Benefits in Withholdings and Payments on Account

A 60% reduction is applied to the withholding and payment on account rates applicable to the following income obtained in Ceuta, when they give the right to apply the deduction.

• Income from work received as administrators and members of boards of directors, of the boards that act in their stead, and other members of other representative bodies.
• Income from work derived from labor or statutory relationships and from pensions and passive assets, and arrears that should be imputed to previous years.
• Income from work derived from giving courses, conferences, colloquiums, seminars and similar, or derived from the elaboration of literary, artistic or scientific works, provided that the right to exploit them is assigned.
• Income from movable capital with the right to deduction for income obtained in Ceuta or Melilla from the companies referred to in the LIRPF art.68.4.3º.h (companies that effectively and materially operate in Ceuta and Melilla whose income enjoys a rebate in the IS).
• Income from professional activities established by regulation.
• Income from the lease or sublease of urban real estate, whatever its classification, when the property is located in Ceuta or Melilla.

Likewise, as from the aforementioned date, the percentages of the installment payments to be made by taxpayers who carry out economic activities with the right to a deduction in the installment are reduced by 60%.

Dividends from entities whose income has been tax-relieved

Under COUNCIL DIRECTIVE 2011/96/EU of 30 November 2011 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States:

The directive applies to a parent company which holds in the capital of a company of another Member State, which meets the same conditions, a minimum shareholding of 10%. Where this occurs, the subsidiary distributing the dividend:

• either shall refrain from taxing them;
• or tax them, while authorizing the parent company (and its permanent establishment) to deduct from the amount of its tax the fraction of the tax related to such profits and paid by the subsidiary and any lower-tier subsidiary, up to the maximum amount of tax due.
• The Member State to which the parent company belongs may not levy a withholding tax on the profits received by the parent company from its subsidiary.

With respect to the taxation applicable to Gaming

Article 81 of the State Budget Law presents some relevant changes for online games, by reducing most of the rates of the Tax on Gambling Activities (IAJ) provided for in Article 48 of Law 13/2011, of May 27, on Gambling Regulation. The main variations fall on contests, raffles and mutual bets (except for “Apuestas del Estado”) as they are now taxed on the taxable base of gambling winnings, and not on the volume of bets. So, indirectly, the main beneficiaries are the audiovisual media where the former are exploited (they are broadcasted through call TV programs and similar). In addition, all online operators in general will also benefit, because the general applicable rate is reduced to 20% from 25%.

In the chapter on the tax on online games, a special tax regime is included for Ceuta and Melilla, for online game operators who decide to establish themselves or move to these Autonomous Cities, provided that they have their “fiscal” domicile there and are “really established”, since the tax rates in this case are reduced by half in all the sections, that is to say, to 10%.

The following gambling activities are understood to be included, provided that the activity carried out has a state scope:

1. a)Lotteries, bets and any others, in which amounts of money or objects economically assessable in any form are risked, on future and uncertain results, and which allow their transfer among the participants, regardless of whether the degree of skill of the players predominates in them or whether they are exclusively or fundamentally of luck, lot or chance.

However, lottery games are not subject to the tax.

1. b)Raffles and contests, in which the participation is carried out by means of an economic consideration.
2. c)Games of occasional character: they are differentiated from the rest of the games foreseen in the previous sections by their sporadic character.
3. d)Cross-border gaming activities: these are those carried out by individuals or legal entities located outside Spain that organize or offer gaming activities to residents in Spain.

Also included in the scope of application of this Law are the advertising, promotion and sponsorship activities related to the gaming activities listed in this section.

Taxpayers as taxpayers: individuals, legal entities or the entities included in the LGT art.35.4 that operate, organize or develop the taxed activities

Accrual: as a general rule, it occurs with the authorization, celebration or organization.

Taxable Base: depending on the type of game, it may be constituted by:

• The gross income: total amount of the amounts that are dedicated to the participation in the game, as well as any other income that may be obtained, directly derived from its organization or celebration.
• Net income: as a general rule, this is the amount of gross income, less the prizes paid by the operator to the participants. However, in the case of cross betting or games in which the taxpayers do not obtain as their own income the amounts played, but simply transfer them to the players who have won them, the taxable base is made up of the commissions and any amount for services related to the gaming activities paid by the players to the taxpayer, whatever they may be called.

Tax rate: the rates applicable to the taxable base are those set forth below:

1. For mutual, counterpart and cross sports betting; mutual and counterpart horse betting; other mutual, counterpart and cross betting:

• general rule: 20%;
• operators with tax residence in their territories and actually located in Ceuta: 10%.

2. In raffles:

• general rule: 20%, except for those declared to be of public utility or charity, which are taxed at 5%;
• operators with tax residence in their territories and actually based in Ceuta: 10%, except for those declared to be of public utility or charity, which are taxed at 2.5%

3. In contests and other games:

• general rule: 20%;
• operators with tax residence in their territories and actually located in Ceuta: 10%.

On the taxable base for random combinations for advertising or promotional purposes, the following rates are applied

• general rule: 10%;
• operators with tax residence in their territories and actually located in Ceuta and Melilla: 5%.

Conclusions On the compatibility between IS and IAJ

First.- The exploitation of gambling is an economic activity which, as such, should be subject to taxation for the support of public expenditure. However, gambling operators are subject to a specific taxation through the IAJ, and in addition, they are also subject to corporate income tax (hereinafter, IS). It should be noted that the taxable base that is taxed by the IAJ in the vast majority of games is the net income, while for the IS the net profit of the activity is taken into account. Therefore, although the taxable base taxed by the two taxes is different, the reality is that the two taxable events overlap, with the consequence that the gaming activity is taxed by two different taxes. In addition, the IS does not contemplate any type of deduction applicable for online gaming operators, except for the deductions for research and development and technological research indicated in Article 35 of Law 27/2014, of November 27, on Corporate Income Tax, which could become applicable since the online gaming sector is in continuous technological development. However, in order to be able to apply a deduction of this type, the formal requirements presented are not easy to comply with and neither to justify for the gambling operator.

Second.- Another point to be commented on is how VAT acts in the online gaming sector, since it is important to analyze its exemption in the gaming activity. Pursuant to article 20.1.19 of Law 37/1992, of December 28, 1992, on Value Added Tax, all activities subject to gaming taxes or IAJ are exempt from VAT, i.e. the gaming activities carried out by the operator are not subject to VAT.

In Ceuta, there is no VAT but we have the IPSI, however in its article 7 an exemption is foreseen due to equalization to the VAT Law:

Article 7. Exemptions in internal operations.. The production or elaboration of movable tangible goods, the provision of services, the supply of real estate and the consumption of electrical energy will be exempt from the tax, when the supply of the produced or elaborated goods, the provision of services, the supply of real estate or the consumption of electrical energy have such exemption recognized in the common legislation of the Value Added Tax.

Although the exemption may seem advantageous, the reality is that only the players benefit, since the gaming operator will not pass on the IPSI to the participants. That is why the IPSI exemption is negative for the gaming operators, since they will not be able to pass on the IPSI for the purchase of goods and services that have been necessary for the correct development of their activity. For all these reasons, the gaming operators must bear the applicable rate of the IPSI applicable below, because the operations of purchase of goods and services of these are normally subject to those rates of taxation, and as a consequence, the operator will find the corresponding percentage more expensive its activity because it will not be able to transfer the indirect tax to the players.

• Rate 0,5%: Taxes on passenger transportation, delivery of subsidized housing (VPO), new housing.
• Rate 1%: applies to cabs, one-fork restaurants, bars, cafés and electricity consumption.
• Rate 2%: includes two-fork restaurants, special category bars and other hotel and catering services.
• Rate 4%: this rate is levied on services and real estate of a general nature, renovation of dwellings or premises.
• Rate 8%: applies to telecommunications, services rendered by electronic means, radio and television broadcasting.
• Rate 10%: this rate includes real estate constructions.

Third.- Finally, another aspect that leads to excess taxation in online gaming is the aforementioned fee for the administrative management of gaming set forth in article 49 of the LRJ. The purpose of said fee is to cover the expenses generated by the actions of the CNJ, and it is for this reason that the existence of this tax figure suggests all kinds of doubts since the CNJ has never been constituted as was stated in previous lines.

? As of December 31 of each year, 0.75 per thousand of the gross operating income ?