COVID-19: CIT and VAT implications of measures in the corporate and insolvency fields introduced by RDL 16/2020

Spain - 05 / 03 / 2020

Spain Tax Commentary

The April 29, 2020 edition of the Official State Gazette -BOE- published Royal Decree-Law 16/2020, of April 28, 2020 on procedural and organizational measures to confront COVID-19 in the justice system, aimed primarily at getting the justice system ready for a return to normal operations by the courts and tribunals, finding a quick way through the build-up of proceedings suspended by the declaration of the state of emergency, and adopting measures to cope with an increase in lawsuits as a result of the extraordinary measures that have been adopted and of the economic climate arising from the health crisis.

In relation to this aim, the two most important measures (among others, regarding tax judicial review procedures) are:

First, the exceptional reduction of the August vacation period by treating the days between August 11 and August 31 as business days for all judicial activities.
Secondly, the recommencement of any time periods suspended as a result of the declaration of the state of emergency (in other words by not counting any of the period that had already run before that declaration).

It also extends the time periods for lodging appeals against judgments and other decisions that end proceedings and are notified during the suspension of time periods under Royal Decree 463/2020, of March 14, 2020, together with any notified within twenty business days after the suspended time periods are lifted.

Alongside these procedural measures, other measures are adopted in the insolvency and corporate law fields to tackle any obstacles that the health crisis causes for the viability of distressed companies and self-employed workers. A few of these other measures have evident tax implications. Namely the provisions specifying that (i) losses for 2020 will not be included to determine whether a company meets a ground for winding up, (ii) suspension of the duty to petition for an insolvency proceeding is extended until December 31, 2020; and (iii) the duty to commence the liquidation phase is delayed until that same date.

The most evident tax effects of these three measures are outlined below:

1. On consolidated tax group regimes for corporate income tax and VAT purposes

a. Under article 58.4 of Corporate Income Tax 27/2014, of November 27, 2014 (LIS), companies are not allowed to form part of tax groups, if, at closing, their net worth positions are as described in article 363.1.e) of the Revised Capital Companies Law, according to their financial statements, unless at the end of the fiscal year in which the financial statements are approved that position has been resolved.

In other words, if a company belonging to a tax group comes to meet a mandatory ground for winding up in a fiscal year and fails to resolve that position in the following fiscal year (when the financial statements for the first year are approved), it must be excluded from the tax group.

b. Under the same article, companies are not allowed to form part of tax groups if, at closing, they are subject to insolvency orders and for all periods in which that insolvency order is in effect.

c. Lastly, under article 163 septies of Value Added Tax Law 37/1992, of December 28, 11992, if, at the end of any liquidation period, a company belonging to a VAT group is in a position of insolvency or in the process of liquidation, it must be excluded from the special regime for the group in that period. This is regardless of whether the special regime continues to be applied to the other companies meeting the requirements laid down for this purpose.

Royal Decree-Law 16/2020 has put in place, as we mentioned, the following measures:

a. Firstly, it determines that, solely for the purpose of determining the existence of the legal ground for winding up by reason of losses, as defined in article 363.1 e) of the Revised Capital Companies Law, losses for fiscal year 2020 will not count.

b. Secondly, it has extended suspension of the duty to petition for an insolvency order until December 31, 2020. It also specifies that, until December 31, 2020, the courts cannot admit for consideration any petitions for necessary insolvency orders filed since the declaration of the state of emergency (March 14, 2020).

These measures work in favor, therefore, of the continued existence of tax groups or of companies’ ability to remain in tax groups during 2020, in that the foreseeable tax losses that will be incurred as a result of the current economic situation will not affect the ground for mandatory winding up in this fiscal year; and additionally, they will have delayed insolvency orders on companies.

2. On the ability to deduct bad debt provisions for corporate income tax purposes and on the recovery of VAT in the event of default

To allow companies to stay afloat where, before the state of emergency, they had regularly been meeting their obligations under an arrangement with creditors, under an out of court payment agreement, or under a validated refinancing agreement, the time limit for the duty to request commencement of the liquidation phase is extended.

Namely, for a year from declaration of the state of emergency the debtor will not have a duty to request liquidation of the assets available to creditors where the debtor knows it is impossible to meet committed payments or obligations entered into after the approval of the arrangement with creditors, on condition that the debtor files a proposal for amendment of the arrangement and this proposal is admitted for consideration within that time period.

In that same time period, the court cannot deliver a decision commencing the liquidation phase, even if the creditor evidences any of the facts that may provide a ground for an insolvency order.

These measures, together with those explained in relation to the suspension of insolvency orders, have important implications for corporate income tax and VAT purposes.

a. For corporate income tax purposes, impairments losses on receivables associated with the debtor’s potential bad debts are deductible, where, when the tax falls due, the debtor is in a position of insolvency (article 12 of the Corporate Income Tax Law).

This same article also determines that impairment losses on receivables associated with debts owed by related individuals or entities are not deductible, unless they are in a position of insolvency, and if commencement of the liquidation phase has been ordered by the court, as specified in Insolvency Law 22/2003, of July 9, 2003.

b. Moreover, the taxable amount for VAT purposes may be reduced where the customer for the transactions subject to VAT has not paid the charged VAT amounts, and an insolvency order was delivered after the VAT became chargeable on the transaction.

Therefore, (i) the extension of the time period for a petition for an insolvency order by the debtor and for it to be handled by the courts, and (ii) the deferral of the debtor’s duty to request commencement of the liquidation phase and the deferral of its commencement by the court will affect the deduction of impairment losses; unless any of the other scenarios allowing bad debt provisions to be deducted exist (delayed payment by more than 6 months, standing trial for a criminal offense of dealing in assets with a view to defrauding creditors or a judicial or arbitration claim).

And, secondly, these measures will delay the ability to recover input VAT, unless any of the other scenarios allowing the taxable amount to be modified exist (where the requirements to treat the claims as uncollectible are met, for example).