Royal Decree-Law 4/2024, of June 26, extending measures to address economic and social consequences of conflicts in Ukraine and the Middle East and adopting urgent fiscal, energy, and social measures

I. GENERAL PROVISIONS HEAD OF STATE 12944 Royal Decree-Law 4/2024, of June 26, extending certain measures to address the economic and social consequences derived from the conflicts in Ukraine and the Middle East and adopting urgent measures in fiscal, energy, and social matters.

I Since the beginning of 2022 and to date, a total of eight packages of measures have been approved with the objective of addressing the consequences in Spain of the war in Ukraine, including both normative and non-normative measures, which have been adapted to the evolution of the economic and social situation.

Thus, first, Royal Decree-Law 6/2022, of March 29, was approved, adopting urgent measures within the framework of the National Plan for response to the economic and social consequences of the war in Ukraine, which pursued basic objectives of containing energy prices for citizens, businesses, and public support for the most affected sectors and most vulnerable groups.

On the other hand, through Royal Decree-Law 10/2022, of May 13, establishing temporarily a mechanism for adjusting production costs for the reduction of electricity prices in the wholesale market, a mechanism for adjusting production costs for the reduction of electricity prices in the wholesale market was adopted. Thus, the so-called "Iberian mechanism" allowed a significant reduction in electricity costs in Spain and Portugal, protecting the economy and society from part of the effects of the war in this area.

The persistence of the armed conflict between Russia and Ukraine led to the adoption of a second package of measures, through Royal Decree-Law 11/2022, of June 25, adopting and extending certain measures to respond to the economic and social consequences of the war in Ukraine, to face situations of social and economic vulnerability, and for the economic and social recovery of the island of La Palma. Through this regulation, continuity was given to the main temporary measures to reduce energy prices, inflation, and protect the most vulnerable groups, included in the first aid package. Likewise, new additional measures were incorporated, such as the freezing of the price of the butane cylinder or the subsidy of up to 30% of multi-journey public transport tickets.

As a continuation of this second block of aid, the Government approved Royal Decree-Law 14/2022, of August 1, of economic sustainability measures in the field of transport, in matters of scholarships and study aid, as well as savings, energy efficiency, and reduction of dependence on natural gas, driving a range of measures aimed at promoting energy savings, highlighting among others, the free medium-distance public transport and the increase in direct aid for transport.

The next package of measures would be approved by Royal Decree-Law 17/2022, of September 20, adopting urgent measures in the energy field, in the application of the remuneration regime to cogeneration installations and temporarily reducing the Value Added Tax rate applicable to deliveries, imports, and intra-community acquisitions of certain fuels. With this regulation, among other actions, the reduction of VAT on natural gas was agreed.

Subsequently, the Government approved Royal Decree-Law 18/2022, of October 18, approving measures to reinforce the protection of energy consumers and contribute to the reduction of natural gas consumption in application of the "Plan + security for your energy (+SE)", as well as measures in matters of remuneration of personnel serving the public sector and protection of occasional agricultural workers affected by drought.

This new block of measures continued the path of energy savings, in order to prepare the Spanish economy for winter, given the persistence of the Russo-Ukrainian conflict. Among these measures, it should be noted the possibility that neighborhood communities could benefit from the last resort tariff (TUR) of natural gas.

In this way, these first five packages of measures represented an important fiscal effort that was covered, in line with objectives of reducing the deficit and public debt, while having a very positive effect on the evolution of inflation and the main economic variables. Although energy prices moderated at the end of 2022, these were replaced by price increases in other essential goods such as food, raw materials, and intermediate goods.

In this context, it was necessary to continue adopting measures to prevent a rebound effect of inflation.

Thus, through Royal Decree-Law 20/2022 of December 27, of measures to respond to the economic and social consequences of the War in Ukraine and of support for the reconstruction of the island of La Palma and other situations of vulnerability, a sixth package of measures was adopted, mobilizing about 10,000 million euros of public resources to articulate the economic policy response to the war in Ukraine from January 1, 2023, concentrating its action on groups vulnerable to the increase in the price of food and other basic goods and on the sectors most affected by the rise in energy.

As a consequence of the duration of the war and the persistence of upward pressures on the prices of food, raw materials, and intermediate goods, some of the measures put into place were extended and updated through Royal Decree-Law 5/2023, of June 28, adopting and extending certain measures to respond to the economic and social consequences of the War in Ukraine, of support for the reconstruction of the island of La Palma and other situations of vulnerability; of transposition of European Union Directives in matters of structural modifications of commercial companies and conciliation of family life and professional life of parents and caregivers; and of execution and compliance with European Union Law.

Since the beginning of 2023, the prices of food, raw materials, and intermediate goods have been moderating and markets adapting to persistent geopolitical uncertainty. In this context, with Royal Decree-Law 8/2023, of December 27, adopting measures to address the economic and social consequences derived from the conflicts in Ukraine and the Middle East, as well as to mitigate the effects of drought, a prudent withdrawal of some of the measures adopted until then was carried out, avoiding possible rebound effects on prices.

In the first half of 2024, the growth of general prices has continued to moderate and forecasts are that they will continue to do so. This is reflected in the evolution of the Consumer Price Index (CPI) from February 2023 (6.0%) to the last available figure for May 2023 (3.6%). According to the latest report from the Bank of Spain, of March 2024, on macroeconomic projections for Spain 2024-2026, inflation levels decreased in February to 2.9% and it is expected that this downward trend will continue in the coming years, forecasting inflation levels of 1.9% in 2025 and 1.7% in 2026. In the same line are the latest economic forecasts made by the European Commission, which estimates that inflation will end in Spain in 2024 at 3.1% and at 2.3% in 2025, which reinforces the forecast of its decrease. This evolution, in which the gradual withdrawal of established measures is foreseen, justifies the continuation of the progressive withdrawal of the measures adopted.

Despite the forecasts for 2024, in these first months of the year there has been a rebound in inflation due to the outbreak of the conflict in the Middle East at the end of 2023 and the partial reversal of support measures against the energy crisis. However, the gradualness in the withdrawal of these measures, such as those linked to VAT on electricity, gas, or the special tax on electricity, notably alleviated the effect on inflation levels.

It is also necessary to pay attention to the evolution of underlying inflation, that is, that which does not consider energy (electricity, gasoline, gas...) or unprocessed food (fruits, vegetables...) for its calculation, although it does consider everything else: processed food, clothing, catering, communications, etc. According to data from the National Statistics Institute (INE), underlying inflation shows a decreasing path from February of the year 2023 to the present, being, since April 2024, below general inflation.

In this context, the role of certain fundamental inputs, such as food, must be highlighted, whose price levels remain systematically higher than general inflation, registering an average increase of 11.7% in 2023, according to INE data. More specifically, in March 2023 the maximum difference between food inflation (16.5%) and general inflation (3.3%) was reached, which allows understanding the behavior of food prices. Thus, an example of the above is the case of olive oil, which increased its prices by 44.4%, or potatoes, with a 19.3% increase.

However, although it is expected that food prices will decrease, in line with general inflation, the Bank of Spain recently published its forecast that in 2024 food prices will increase on average by 4.5%. Therefore, and taking into account the basic role played by these inputs, it seems advisable a temporary extension only of the measures intended to mitigate the increase in the price of these fundamental inputs.

On the other hand, it is fundamental not to risk the sustainability of public finances nor the compliance with the objectives of reducing the deficit and public debt.

For this, it is important, as is being done in this royal decree-law, to be able to propose flexible measures that support that sustainability of public finances, even more so in a context of activation of fiscal rules within the European framework. Thus, factors such as those mentioned above are key to maintaining the stability of public finances and to sustain economic growth. As an example, Spain was the fourth country in the EU that dedicated the most resources in 2023 to alleviate the energy crisis. The moderation of these measures may serve to reduce public spending levels, taking advantage of the better context of the international energy market, and improve public deficit levels.

II This royal decree-law is structured in an expository part and a dispositive part consisting of five titles, formed by thirty-nine articles, three additional provisions, one transitional provision, one repealing provision, seven final provisions, and an annex.

Title I is dedicated to fiscal measures, of a remuneration nature and related to territorial financing systems.

The packages of measures approved since the outbreak of the war in Ukraine, in the spring of 2022, have included measures of a tax nature, pertinent due to the need to adapt to the evolution of the economic and social situation.

Regarding the Value Added Tax, this royal decree-law now includes a temporary extension until December 31, 2024, of the application of reduced tax rates to certain deliveries of food.

To this end, Royal Decree-Law 8/2023, of December 27, established in its article 20 an extension, during the first half of 2024, of the application in the Value Added Tax of the 0 percent rate that applies to basic food products, as well as the 5 percent rate with which olive oils and seed oils and pasta are taxed, to contribute to the reduction of the final price of these foods.

Although underlying inflation has had a positive behavior, with a downward trend in recent months, the annual inflation rate of food and non-alcoholic beverages remains high with a moderate rebound during the last months of the first half of 2024. On the other hand, although the widespread and abundant rains of the semester presage an important recovery of olive production for the next campaign, which will reduce its price, for the remainder of the year there remains an upward trend in the price of this essential product of the Mediterranean diet.

Consequently, in order to favor a positive evolution of food inflation in the coming months and its consequent positive impact on the Spanish population, and especially on the most disadvantaged people, as well as the gradual elimination of this exceptional measure, the reduction of VAT on these foods is maintained at the rates of 5 percent (pasta and seed oils) and 0 percent (basic foodstuffs and olive oils) until September 30, 2024. From that date, for which a significant reduction in inflation is already estimated, the tax rates will increase to 7.5 and 2 percent, respectively, until December 31, at which moment the price reduction will allow the suppression of this exceptional and transitory measure without affecting the purchasing power of families. In this way, reasonable final prices for these foods are guaranteed until the full normalization of the market, which will presumably occur during the last quarter of this year and will continue in 2025.

However, as has been pointed out, the tax rate applicable to the delivery of olive oil, a basic and essential food of a healthy diet, is reduced from the preceding 5 percent to 0 percent until September 30, passing to tax at the rate of 2 percent from October 1 until the end of the year and, what is more important, it is consolidated as a basic foodstuff at the super-reduced rate of 4 percent from January 1, 2025, which requires a modification of Law 37/1992, of December 28, on the Value Added Tax, with indefinite character for these effects.

On the other hand, the rates of the equivalence surcharge applicable to these products are maintained at 0.6 and 0 percent in relation to the application of VAT rates of 5 and 0 percent, which are increased to 1 and 0.26 percent, when the aforementioned foods pass to tax at the tax rates of 7.5 and 2 percent, respectively.

Thus, this measure aims to protect citizens, and especially the most vulnerable groups, from the risks of instability in food prices.

Articles 1 and 2 reflect these changes in the taxation of food, regarding the Value Added Tax.

On the other hand, in the field of the Personal Income Tax, it is essential to carry out the appropriate legal changes to avoid subjecting taxpayers with gross income from work below the new minimum interprofessional wage approved by Royal Decree 45/2024, of February 6, which sets the minimum interprofessional wage for 2024, that is, 15,876 euros annually.

In a first phase, Royal Decree 142/2024, of February 6, modifying the Regulation of the Personal Income Tax, approved by Royal Decree 439/2007, of March 30, in matters of withholdings and payments on account, has introduced the appropriate changes in the general calculation procedure for withholding to achieve that recipients of the minimum interprofessional wage do not bear withholding or payment on account. Logically, recipients of work income close to the amount of said minimum interprofessional wage also saw their withholdings and payments on account reduced, since otherwise there would have been a clear jump error.

Now it is necessary to carry out the modifications in Law 35/2006, of November 28, on the Personal Income Tax and partial modification of the laws on Corporate Tax, on Non-Resident Income Tax, and on Wealth Tax, through article 3 of this royal decree-law, with the purpose of avoiding that the reduction in the amount of withholding derived from the new regulatory framework does not consolidate in the annual declaration in case of being obliged to present it.

To this effect, in a manner identical to the change operated in matters of withholdings, the amount of the reduction for obtaining work income is increased from the current 6,498 euros to 7,302 euros annually, an amount that will subsequently decrease linearly in two tranches as income increases.

With this increase in the reduction, the taxation threshold is expanded, that is, the amount of annual gross salary from which one starts to pay the Personal Income Tax, from the current 15,000 euros annually to 15,876 euros annually, an amount coincident with that of the current minimum interprofessional wage.

Consistently, the lower threshold for the obligation to declare for recipients of work income is raised to 15,876 euros annually, as they do not have to tax this Income Tax with respect to such income.

In the field of Corporate Tax, and in order to continue promoting the electrification of mobility, through article 4 of this royal decree-law, the fiscal incentive intended to promote investments in new FCV, FCHV, BEV, REEV, or PHEV vehicles or in new charging facilities, both for private use and accessible to the public, of electric vehicles, contained in the eighteenth additional provision of Law 27/2014, of November 27, on Corporate Tax, is reinforced, replacing the currently valid accelerated amortization, consisting of applying double the maximum linear amortization coefficient according to officially approved tables, by free amortization, provided that they are new investments that enter into service in the tax periods initiated in 2024 and 2025.

The application of this free amortization is also enabled for taxpayers of the Personal Income Tax who determine the net income of their economic activity according to the objective estimation method. In this way, a new fifty-ninth additional provision is added to the aforementioned Law 35/2006, with the object of applying the aforementioned free amortization in Corporate Tax to taxpayers who determine the net income of their economic activity according to the objective estimation method.

The capitalization reserve is also strengthened, a fiscal incentive of great importance that aims to promote business capitalization by increasing net equity, and, with it, incentivize the recovery of companies and their competitiveness, affecting the equalization in the fiscal treatment of external and own financing.

Finally, in matters of fiscal measures, on the one hand, article 5 of this royal decree-law extends, for the year 2024, the fiscal benefits established in the Real Estate Tax and in the Economic Activities Tax by article 25 of Royal Decree-Law 20/2021, of October 5, adopting urgent support measures for the repair of damages caused by volcanic eruptions and for the economic and social reconstruction of the island of La Palma, given that, although the Cumbre Vieja volcanic eruptions have already finished, effects persist that hinder the return to normality for the victims.

On the other, in the Personal Income Tax, the temporal scope of the deduction for obtaining income in Ceuta and Melilla is expanded, so that it will also be applicable, under the same terms and conditions, to taxpayers with habitual and effective residence on the island of La Palma in the tax period 2024.

This royal decree-law therefore adopts tax measures of protection and improvement for citizens, especially those with lower incomes and more vulnerable, without risking the sustainability of public finances and compliance with fiscal rules.

At the same time, this Title I also collects measures in matters of remuneration of personnel serving the public sector. Thus, article 6 establishes a maximum global increase of 2 percent with respect to the remuneration in force on December 31, 2023, with effects from January 1, 2024. This average is necessary to comply with the Framework Agreement for an Administration of the 21st Century, signed on October 19, 2022, which established a multiannual framework for remuneration increases for employees serving the Public Administrations that extends between the years 2022 and 2024. Thus, the Agreement established for the aforementioned years a fixed salary increase, plus an additional percentage of increase linked to the evolution of the HICP (Harmonised Index of Consumer Prices) and GDP (Gross Domestic Product).

Given that it has been necessary to extend the General State Budgets for the year 2023, for the fulfillment of the commitments assumed, it is necessary the approval of this norm that enables the application of the increase in the remuneration of personnel serving the public sector provided for in the aforementioned Agreement.

Finally, this Title I also contains measures related to the resources of the territorial financing systems.

The General State Budget Law becomes each year the necessary instrument to provide the autonomous communities and local entities with the resources resulting from the application of territorial financing systems, through the advance payments that must be transferred.

In the current situation of extension...