Spanish Supreme Court confirms National Appellate Court’s principle: offsetting tax losses is not a tax option

Article 119 of the General Taxation Law (LGT) states that options which the tax legislation requires to be elected, requested or waived with the filing of a return may not be modified after this point, unless the correction occurs in the statutory filing period. On the basis of that article, tax auditors and economic-administrative tribunals have not been allowing taxpayers to offset their tax losses outside the ordinary time limit for filing corporate income tax self-assessments; and this is because, in their opinion, where a taxpayer fails to offset a tax loss on its self-assessment, it is electing an option which therefore cannot later be modified.

The National Appellate Court had already rejected this interpretation in a judgment delivered on December 11, 2020 (discussed in our alert on January 15, 2021 and our  blog post on February 23, 2021). It has since reiterated this interpretation clearly and plainly in its recent judgment on October 29, 2021. According to this court, offsetting tax losses is not a tax option, instead a taxpayers right linked to the principle of economic capacity recognized in article 31 of the Constitution.

Lastly, in a judgment on November 30, 2021 (appeal 4464/2020), the Supreme Court reached the same conclusion as the National Appellate Court, when examining whether tax losses are allowed to be offset on a self-assessment filed outside the time limit. In its judgment, the court shared the following thoughts:

a) The General Taxation Law and its implementing regulations are not clear in this respect, because they do not define the legal concept of a tax option, and it is not consistent for unfavorable legal and economic consequences to arise for the taxpayer on the basis of the absence of that definition. This lack of conceptual clarity creates effects with systemic proportions when it comes to interpreting principles governing the tax system such as the principle of economic capacity, the principle of equitable distribution of the tax burden or the principle of proportionality.

b) Article 119.3 of the General Taxation Law only refers to options which, under tax law, must be elected, requested or waived when filing a return. Therefore, for a tax option falling under that article to exist, it will be necessary for it have been defined as such in tax law.

For this to happen two requirements must be met: an objective requirement, consisting of embodiment in the law of an alternative choice between different and exclusive tax arrangements; and another volitional requirement, consisting of a free act by the taxpayer which will be reflected on the taxpayer's return or self-assessment. Therefore, there is no option if the taxpayer exercises an independent right, set out in the law without any alternatives.

Moreover, all options must be able to be elected, requested or waived only on a return. For these purposes, returns must be explicit or implicit, but unambiguous.

c) On the subject of offsetting tax losses, the corporate income tax law states that tax losses “may be offset” against income in later periods, which means that the taxable person can choose whether they offset them or not, and determine (within the statutory limits) the period in which they will offset them and their amount. In other words, this is not technically a tax option, because no alternative is described consisting in choosing between two different and exclusive tax regimes.

The offset of tax losses is instead an independent right of the taxpayer which serves the principle of economic capacity and, due to being a right of this kind, it cannot be restricted, except for the reasons set out in the law. Moreover, added the court, “a taxpayer who fulfills its obligation to report its tax losses to be carried forward, while informing the tax authorities of the existence itself of the tax losses, is also giving them notice that it will exercise that right in the future”.

Elsewhere, in the most recent of the national appellate court judgments mentioned above (delivered on October 29, 2021), the court affirmed that a refund arising from the offset of tax losses which was not done in the voluntary period amounts to a refund of tax incorrectly paid and therefore must include interest calculated from the date on which the incorrect payment was made (therefore, if prepayments were incorrectly made because the tax losses had not been offset, late-payment interest must be calculated from when those payments were made).

TEAC ruled recently on this same subject of tax incorrectly paid in prepayments in a decision on September 22, 2021. In this decision it examined the case of a taxpayer who, after requesting correction of its corporate income tax self-assessment, obtained a refund of the amounts incorrectly paid, although with late-payment interest calculated only on the excess determined in its self-assessment of the tax.

TEAC affirmed in its decision that the tax authorities clearly obtained amounts of tax incorrectly from the time they were paid when the prepayments were made; because, in this case, the cause of the excess amount in the prepayments is not the mechanics of the tax, instead an incorrect determination of the basis for calculating those payments. Therefore, late-payment interest must be calculated from when each prepayment was made, on the excess paid in each of them.

This conclusion is similar to that determined by the Supreme Court in a judgment on January 28, 2021, summarized in our February 2021 Newsletter.