18.- TAX NOTE

Tax consolidation scheme

The Group operates in many countries and is therefore subject to the regulations of different tax jurisdictions regarding taxation and corporate income tax.

NH Hotel Group, S.A. and another 15 companies with tax domicile in Spain in which it held a direct or indirect stake of at least 75% during the 2017 tax period are subject to the tax consolidation scheme governed by Chapter VI, Title VII of Act 27/2014 on Corporate Income Tax.

The companies belonging to the tax group have signed an agreement to share the tax burden. Hence, the Parent Company settles any credits and debts which arise with subsidiary companies due to the negative and positive tax bases these contribute to the tax group.

The companies that make up the tax consolidation group are the following:
NH Hotel Group, S.A.
Latinoamericana de Gestión Hotelera, S.L.
NH Central Reservation Office, S.L.
NH Hoteles España, S.A.
NH Hotel Ciutat De Reus, S.A.
Gran Círculo de Madrid, S.A.
NH Logroño, S.A.
Iberinterbrokers, S.L.
NH Europa, S.L.
Atardecer Caribeño, S.L.
Hoteles Hesperia, S.A.
Nuevos Espacios Hoteleros, S.A.
Coperama Holding, S.L.
Coperama Spain, S.L.
NH Las Palmas, S.A.
NH Lagasca, S.A.

Corporation tax is calculated on the financial or accounting profit or loss resulting from the application of generally accepted accounted standards in each country, and does not necessarily coincide with the tax result, this being construed as the tax base.

In 2017, Spanish companies pay taxes at the general tax rate of 25% irrespective of whether they apply the consolidated or separate taxation schemes. The foreign companies are subject to the prevailing tax rate in the countries where they are domiciled. In addition, taxes are recognised in some countries at the estimated minimum profit on a complementary basis to Corporation Tax.

The prevailing corporation tax rates applicable to Group companies in the different jurisdictions where the Group has significant operations are as follows:

Financial years subject to tax inspection

In accordance with Spanish tax legislation, the years open for review to the Consolidated Tax Group are:

Taxes	Pending Periods
Corporation	2014, 2015 and 2016
VAT	2014, 2015, 2016 and 2017
IRPF (personal infome tax)	2014, 2015, 2016 and 2017
Non-resident income tax	2014, 2015, 2016 and 2017

During 2017, in Spain there were no open tax inspections in progress in relation to the taxes included in the previous table.

In Germany, an inspection procedure has been opened which is reviewing the amount of negative tax bases still to be offset by the companies in Germany

Another inspection procedure has been opened in France by the French authorities who are checking the overall tax position of the subsidiary in that country

Finally, an inspection procedure has been opened in Colombia focused on the deductions of certain Corporation Tax expenses.

The Group’s Directors do not expect any significant contingencies to arise from the conclusions of the inspections.

Regarding the financial years open to inspection in the rest of the group, contingent liabilities not susceptible to objective quantification may exist, which are not significant in the opinion of the Group’s Directors.

Balances with Public Administrations

The composition of the debit balances with Public Administrations at 31 December 2017 and 2016 is as follows:

	Thousands of euros
	2017	2016
Deferred tax assets
Tax credits	96.689	108.515
Tax assets due to asset impairment	32.095	31.744
Tax withholdings of workforce	2.686	2.581
Other prepaid taxes	6.526	9.549
Total	137.996	152.389

	Thousands of euros
	2017	2016
Short-term taxes receivable
Corporate tax	9.179	9.303
Value Added Tax	6.521	12.538
Other tax receivables	8.043	7.390
Total	23.743	29.231

The movements of the “Deferred tax assets” item in 2017 and 2016 were as follows:

	Thousands of euros
	2017	2016
Opening balance	152.389	165.797
Asset impairment	351	757
Generation of assets due to tax losses	4.039	12.305
Settlements of assets due to tax losses	(10.512)	(16.760)
Activation of deductions	-	865
Settlement of deductions	(5.353)	(2.346)
Others	(2.919)	(8.229)
Total	137.996	152.389

The recognition of assets for tax losses is mainly due to the activation of tax losses in Germany and Latin America amounting to 1,841 and 1,691 thousand euros respectively, as a result of the positive results expected in future years.

The cancellation of assets is mainly due to the application of tax losses to offset the positive tax bases generated in 2017, mainly in Spain, Belgium, Italy and Germany, amounting to 3,608, 789, 3,114 and 3,002 thousand euros, respectively. Additionally, the application of deductions in Spain has been made in the amount of 5,353 thousand euros as a result of their use to offset the positive share resulting in 2017.

At 31 December 2017, the Group had assets resulting from tax losses and activated deductions amounting to 96,689 thousand euros (108,515 thousand euros in 2016). At 31 December 2017, the tax credit recovery plan that supports the recognition of these tax credits had been updated. Given that the results of the tax credit recovery plan are satisfactory, the Parent Company’s Directors have decided to maintain the tax credits recognised in the consolidated balance sheet.

At 31 December 2017, the Group had tax loss carryforwards worth 605,591 thousand euros (566,518 thousand euros at 31 December 2016) and deductions amounting to 28,030 thousand euros (29,637 thousand euros in 2016) that had not been entered in the accompanying consolidated balance sh

	Thousands of Euros
	2017	2016
Finance costs and negative tax bases
Non-deductible financial expenses in Spain	260.852	223.095
Non-deductible financial expenses in Italy	-	6.424
Non-deductible financial expenses in Germany	3.397	5.366
Negative tax bases generated by the Spanish entities before consolidation	103.572	106.325
Negative tax bases generated in Austria	33.827	24.449
Negative tax bases generated in Latin America	239	4.175
Negative tax bases generated in Luxembourg	43.068	53.231
Negative tax bases generated in Italy	-	1.797
Negative tax bases generated in Germany	142.787	141.656
Negative tax bases USA	3.445	-
Negative tax bases France	9.781	-
Negative tax bases generated in South Africa	4.426	-
Bases imponibles negativas generadas en Sudáfrica	197	-
Total	605.591	566.518
Deductions
Deductions generated in Spain	28.030	29.637
Total	28.030	29.637
Total	633.621	596.155

Finance costs, are not considered deductible in the Spanish Corporation Tax when exceeding 30% of the operating revenue of the tax group calculated in accordance with Article 16 of Act 27/2014 of 27 December, on Corporation Tax, amount to 260,852 thousand euros in 2017 (223,095 thousand euros in 2016). There is no deadline for offsetting non-deductible finance costs. In respect of German Corporation Tax, the tax regulations of this country are similar to those of Spain in terms of the limitation of deductibility of the financial charge which, accordingly there is no deadline for offsetting non-deductible finance costs.

The changes in non-recorded credits in 2017 were mainly due to the fact that in Spain no finance costs were deducted owing to the application of the aforementioned regulations, and losses and deductions were offset against the profit generated in the year. In Italy losses were fully offset and finance costs generated were deducted, and in Germany finance costs were deducted and losses which had passed the tax credit recovery test were recognised.

The composition of the credit balances with Public Administrations at 31 December 2017 and 2016 is as follows:

	Thousands of Euros
	2017	2016
Deferred tax liabilities
Revaluation of assets and other valuation differences	167.433	174.987
Total	167.433	174.987

	Thousands of Euros
	2017	2016
Short-term taxes payable
Corporate tax	9.021	12.454
Value Added Tax	1.298	3.042
Personal Income Tax	8.769	6.687
Tax on Income from Capital	1.315	2.100
Social Security	6.833	7.045
Others	18.624	13.610
Total	45.860	44.938

The movements in deferred tax liabilities during 2017 and 2016 are as follows:

	Thousands of Euros
	2017	2016
Opening balance	174.987	196.711
Additions of liabilities due to the entry into the consolidation	-	698
Others	(7.554)	(22.422)
Closing balance	167.433	174.987

The reduction in deferred tax liabilities is mainly due to the reversal of impairment on revalued assets.

The detail, by country and item, of these deferred taxes is as follows:

	Thousands of Euros
	Tax credits	Prepaid taxes	Total assets	Liabilities
Spain	91.284	20.657	111.941	35.329
Benelux	1.138	195	1.333	1.205
Italy​(1)	205	9.688	9.893	107.894
Germany	1.841	2.783	4.419	526
Others	2.221	7.984	10.410	22.479
TOTAL	96.689	41.307	137.996	167.433

(1) The business area of Italy includes companies resident in Belgium, Germany, Holland and the USA.

Reconciliation of the accounting result to the tax result

The reconciliation between the consolidated comprehensive profit or loss statements, the corporation tax base, current and deferred tax for the year, is as follows:

	Thousands of Euros
	2017													2016
	Spain	Italy(1)	Germany	Holland(2)	Latinamerica(3)	Luxembourg	Romania	Switzerland	Czech Republic	Poland	Portugal	Others	TOTAL	Spanish companies	Other companies
Profit/(Loss) for the financial year-continuing	4.514	23.880	-1.124	36.074	9.339	5.883	241	-2.625	-315	-13	913	-330	76.436	(14.054)	58.412
Profit (loss) for the year from discontinued operations	(2.022)	-	-	(235)	(1.302)	-	-	-	-	-	-	(159)	(3.718)	(2.274)
Consolidated statements of comprehensive profit and loss before taxes	2.492	23.880	(1.124)	35.839	8.037	5.883	241	(2.625)	(315)	(13)	913	(490)	72.718	(16.328)	58.412
Adjustments to consolidated comprehensive profit and loss	-	-	-	-	-	-	-	-	-	-	-	-	-	-	-
Accounting consolidation adjustments	2.022	-	1.304	235	1.302	-	-	-	-	-	-	159	5.022	2.889	4.695
Due to permanent differences	48.183	(5.330)	6.943	(1.333)	8.814	(5.684)	(99)	3.036	315	(50)	(913)	425	54.307	2.934	(14.822)
Due to temporary differences	2.125	(7.518)	(4.448)	436	3.982	-	-	-	-	-	-	15	(5.408)	12.546	11.497
Tax base (Taxable profit or loss)	54.822	11.033	2.675	35.177	22.135	199	142	412	-	(63)	-	110	126.642	2.041	59.780
Current taxes to be refunded / (to pay)	1.353	(69)	(618)	(3.283)	3.212	-	-	-	-	1	12	(451)	157	818	3.938
Total current tax income / (expense)	(13.705)	(2.727)	(802)	(8.934)	(6.656)	(38)	(23)	(35)	-	12	-	(240)	(33.148)	(535)	(16.372)
Total deferred tax income / (expense)	2.050	(1.603)	301	(398)	1.256	-	-	-	-	-	-	4	1.610	3.427	9.408
Total other income / (expense)	86	(1.932)	(112)	580	(138)	-	-	8	-	-	-	(465)	(1.973)	(205)	(3.661)
Total other income / (expense)	(11.569)	(6.262)	(613)	(8.752)	(5.538)	(38)	(23)	(27)	-	12	-	(701)	(33.511)	2.687	(10.625)

(1) The business area of Italy includes companies resident in Belgium, Germany, Holland and the USA.
(2) The Netherlands business area includes Belgium and France.
(3) The Latin America business area includes the profits and losses obtained by the Group in Argentina, Mexico, Uruguay, the Dominican Republic, Colombia, Chile, Panama and Brazil.

Deductions generated by the consolidated tax group of the Parent Company

Al 31 de diciembre de 2017, el Grupo Fiscal dispone de incentivos fiscales pendientes de aplicación de acuerdo con el siguiente detalle (en Thousands of euros):

Year origin	Deduction pending application	Amount
2004 to 2011	Deduction to encourage certain activities (not activated)	28.030
2009 to 2015	Deduction to avoid double taxation (activated)	3.528
2013 to 2014	Others (activated)	729
		32.287