Tax Newsletter - April 2019 | Judgments
Corporate income tax
Interest on a loan to buy treasury stock is not deductible
National Appellate Court. Judgment of February 7, 2019
The company applied for a loan from a financial institution to enable it to acquire treasury stock so that the shares could be redeemed later with the resulting reduction of the company’s capital.
The National Appellate Court confirmed the administrative interpretation disallowing the deduction of interest on that loan, based on the argument that these types of loans do not benefit the company or serve the company's interests, only those of its shareholders.
Corporate income tax
Late-payment interest arising from notices of assessment by tax auditors was deductible before the current Corporate Income Tax Law
Castilla y León High Court. Judgments of September 14 and September 26 2018
The view now appears to be accepted by both the Directorate General for Taxes and by TEAC that the late-payment interest arising from notices of assessment in an audit has been deductible on the corporate income tax return since Law 27/2014, of November 27, 2014, came into force, or in other words, for fiscal years that began on or after January 1, 2015.
According to the administrative interpretation, however, the deduction of this type of interest is not allowed for earlier periods, when the Revised Corporate Income Tax Law approved by Legislative Royal Decree 4/2004, of May 5, 2004 was in force. As a general rule, the deduction of this interest is denied on the basis that the interest arises from actions that are against the law.
Castilla y León High Court, however, leaned towards allowing deduction of the late-payment interest also in periods when the Revised Law was in force, because these expenses had not been included in the list of nondeductible expenses provided in that law. It added that the court can hardly allow the deduction of late-payment interest under the current law and disallow it under the previous legislation, when the wording of both is essentially identical.
The conclusion reached by these judgments matches those upheld in earlier ones, such as the judgment rendered by Aragon High Court on July 20, 2016.
Personal income tax
If it is evidenced that ownership of the assets comes from a statute-barred year, there cannot be an unjustified capital gain
Supreme Court. Judgment of March 18, 2019
A taxpayer had transferred a given sum of money to a checking account. The tax auditors found there had been an unjustified capital gain due to the absence of proof as to when that amount had arisen, even though the taxpayer evidenced that it came from another account in which that amount had appeared in statute-barred years.
The Supreme Court found in the taxpayer’s favor and affirmed that an unjustified capital gain cannot be attributed where the person provides proof that it has owned the assets or rights from a date before the period open for review; in that case, moreover, it is not necessary to identify the source or origin of those assets or rights.
Personal income tax
Tenured public service workers and public sector employees are eligible for tax relief for work performed abroad
Supreme Court. Judgment of March 28, 2019
The Personal Income Tax Law provides an exemption for income from the performance of work abroad (article 7.p). On this occasion the court examined whether this exemption is applicable to income received by “funcionarios” (tenured public service workers) or public sector employees sent on secondment to work abroad for an international organization that has Spain among its members.
The Court concluded that the exemption is applicable as long as the work is actually performed outside Spain and benefits the international organization, even though it may simultaneously give rise to income for the employer or other entities. This holds true even if the work performed outside Spain consists of supervision or coordination tasks and regardless of whether the trips are sporadic or for short lengths of time.
Personal income
Pensions for permanent incapacity received abroad are only exempt if they have been classified as such by the Spanish social security authorities
Supreme Court. Judgment of March 14, 2019
The court examined whether a total disability pension received in Switzerland where the law makes no distinction between different degrees of incapacity may be treated as absolute or comprehensive disability for the purpose of claiming the exemption in article 7.f) of the Personal Income Tax Law.
The Supreme Court concluded that:
- The pension received cannot automatically be treated as a benefit for absolute permanent incapacity under the Spanish social security system, because in Switzerland no distinction is made between one degree of incapacity and another.
- So, to claim the exemption under Spanish law for absolute permanent incapacity benefits a classification decision by the Spanish social security authorities (INSS) is needed. To obtain this classification, the interested party must provide proof of all the elements needed to evidence the specific condition that determined the right to receive the foreign pension.
Nonresident income tax
Spanish law discriminates against nonresident investment funds in Spain
Supreme Court. Judgment of March 27, 2019
As we advanced in our Alert dated April 8, the Supreme Court has confirmed that nonresident investment funds in Spain receive unjustified discriminatory treatment. See our Alert for further details.
Inheritance and gift tax
Final assessments issued under a law precluded by European law may be held null and void as a matter of law
National Appellate Court. Judgment of November 22, 2018
In a judgment rendered on September 3, 2014 the Court of Justice of the European Union held that the Spanish inheritance and gift tax law was precluded by EU law because it did not allow the autonomous communities’ own laws to be applied (as opposed to central government law) in given cases; for that reason the law on the tax was amended starting in January 1, 2015 to allow taxable persons resident in the European Union or in the European Economic Area to benefit from the more favorable autonomous community legislation if certain requirements were met. The Supreme Court has since made this option more widely available to taxable persons resident in third countries, which the tax authorities had already been accepting.
The National Appellate Court examined in a judgment rendered on November 22, 2018 whether to allow an assessment by the tax authorities to be reviewed in that it had already become final when the law governing the assessment was held to be precluded by EU law. The court concluded that, insofar as the Court of Justice of the European Union did not place any limits on the effects of its conclusion, the challenged assessment issued under a law held illegal must be held null and void as a matter of law, and therefore, reviewable, even if it is final.
VAT
Vocational training courses are subject to VAT in the place where they are actually given
Court of Justice of the European Union. Judgment of March 13, 2019, case C-647/17
The CJEU examined whether the place of supply for VAT purposes in relation to an accounting and management course must be the place where the training is actually given (as services in respect of admission to scientific or educational events) or at the place of business of the persons receiving the services (under the standard rule on the place of supply of services for VAT purposes).
In the CJEU’s view, services in respect of admission to educational and scientific events relate to conferences and seminars and include supplies of services of which the essential characteristics are the granting of the right of admission to an event in exchange for a ticket or payment, and therefore they must be subject to VAT in the place where they are actually supplied.
Transfer and stamp tax
The taxable amount for stamp tax purposes in the dissolution of a condominium is the value of the transferred portion of the property
Supreme Court. Judgments of March 14 (1), 20 (3) and 26 (1) 2019
The court examined various cases of dissolution of a condominium in which excesses over their share in ownership occurred for one of the joint owners, who acquired a legally and physically indivisible asset.
In relation to transfer and stamp tax the Supreme Court concluded that:
- The extinguishment of a condominium with the transfer to one of the joint owners of an indivisible asset in exchange for its equivalent value in cash is not subject to transfer tax under the transfers for consideration heading.
- It is, however, subject to stamp tax insofar as the transaction is documented in a public deed.
The taxable amount is the value of the portion of the asset that is transferred. In other words, since the transferee of the property was one of the joint owners, who already owned part of the property before the condominium was extinguished, stamp tax is only charged on the remaining portion of the property which it acquired in the dissolution of the condominium. This confirmed the court’s interpretation as stated in its judgment of October 9, 2018, summarized in our Tax Newsletter - November 2018.
Tax on increase in urban land value
The new Navarra law on the tax on increase in urban land value is unconstitutional
Constitutional Court Judgment of March 27, 2019
In judgment 72/2017 dated June 5, 2017, the Constitutional Court held unconstitutional and null and void given articles of the Navarra Provincial Local Finances Law 2/1995, of March 10, 1995, due to making transfers of land at a loss subject to the tax on increase in urban land value.
This conclusion resulted in the adoption of new provisions through Provincial Law 19/2017 which, among other matters, provided that the courts had to dismiss any proceedings commenced in relation to assessments or self-assessments of the tax on increase in urban land value issued under the previous Provincial Law and return the case records to be examined by the respective local councils.
The Constitutional Court held that the provision was also unconstitutional and null and void by breaching the distribution of powers between the central government and the autonomous community governments (article 149.1.6 of the Constitution), in that the jurisdiction for procedural legislation lies exclusively with the central government.
Tax on increase in urban land value
The Constitutional Court is to examine whether the law on the tax is unconstitutional for cases where the land has increased in value
Constitutional Court Interlocutory order of March 26, 2019
As we announced in our Tax Alert dated April 4, 2019, the Constitutional Court has ruled to admit for consideration another request for a ruling on constitutionality in which it will examine whether the current rules on the municipal tax on increase in urban land value are precluded by the Spanish Constitution also where the transferred land has increased in value but the tax liability is confiscatory or disproportionate in relation to the gain obtained on the transaction.
Tax on increase in urban land value
In the transfer of a piece of land, any development costs after the purchase cannot be added to the cost price to calculate the taxable gain
Supreme Court. Judgment of March 12, 2019
Following the latest case law, it is allowed for the tax on increase in urban land value not to be charged on a transfer of land if no gain was obtained; in the same vein, the courts are now examining whether the tax has to be paid if there is a gain but it is lower than the taxable amount.
In this context, it is particularly important to calculate the sale and the cost price of the transferred land correctly.
In a judgment dated March 12, the Supreme Court concluded that, to calculate the taxable gain, any development costs paid after the purchase cannot be added to the purchase price. These costs, the court said, are part of the value of the land itself and will have been included to determine its transfer value.
Local government fees
Defects in the reasoning of a technical and economic report founding a local government fee cannot be corrected by a court
Castilla y León High Court. Judgment of February 19, 2019
Castilla y León High Court explained in a recent judgment that defects in the reasoning of a technical and economic report issued by a local council when approving the tax rules governing a local government fee cannot be corrected or supplemented in the proceeding related to challenging those rules.
The court recalled that the technical and economic report must include, from when it is issued, all the elements needed to inform the taxpayer straightforwardly and conclusively of the methods and standards employed to quantify the fees.
Management procedure
Adjustments to unreported assets are not allowed in audits of reported values
Supreme Court. Judgment of February 25, 2019
Following an audit of reported values in relation to a property received by inheritance and included on the taxpayer’s tax return, the tax authorities issued an assessment in which they also added the values of a few bequeathed assets that the taxable person had not calculated on the tax return.
The Supreme Court concluded that in an audit of reported values carried out in relation to an inheritance and gift tax self-assessment, the tax authorities cannot include elements other than those appearing in the notarial document for acceptance and award of the inheritance and delivery of bequeathed assets that the taxpayer had attached to their return; this is because in the audit it is only allowed to review the values of assets reported voluntarily.
Tax procedures
An application for deferred or split payment of the debt in the period for enforcement does not stop surcharges applying
Supreme Court. Judgment of March 27, 2019
There are three types of surcharges in the period for enforcement: (a) a 5% enforcement surcharge if the debt is paid over in full before the interlocutory order initiating enforced collection proceedings is notified, (b) a 10% reduced enforced collection surcharge if the debt is paid in full in the voluntary payment period that commences with notification of the interlocutory order, and (c) a 20% ordinary enforced collection surcharge if the debt is paid after the voluntary period.
It was examined whether, after the voluntary period for paying over a tax debt has run and a request for deferred or split payment of the debt has been made before the enforced collection order was notified, the surcharge claimable by the tax authorities is the 5% enforcement surcharge or the 20% ordinary enforced collection surcharge.
The Supreme Court concluded that, following expiry of the voluntary payment period for the tax debt, the application for deferred or split payment of the debt is not treated as payment as such. Therefore, although the application for deferred or split payment of the debt was before the interlocutory order initiating enforced collection proceedings was notified, the claimable surcharge is not the 5% enforcement charge, because the requirement to pay the tax debt in full before notification of the order has not been met.
Principle of criminalizing defined conduct
The Supreme Court examines the analogy mechanism in relation to a contraband offense
Supreme Court (Criminal Chamber). Judgment of February 26, 2019
The Supreme Court (Criminal Chamber) made in this judgment an analysis of the so-called “fill in the blanks” criminal rules (such as those relating to tax offenses) in relation to an alleged contraband offense in a case involving the sale of “tobacco leaves” (criminal law uses the term “tobacco products” not “tobacco leaves”).
The court observed that, whereas “tobacco leaves” are a raw material, “tobacco products” are the result of an industrial process on the raw material. So, treating “tobacco leaves” in the same way as “tobacco products” may only be done by applying an analogy mechanism, which is not allowed by criminal law. Therefore, the alleged contraband of “tobacco leaves” cannot be criminalized due to the absence of defined criminal acts.
Retroactive application of tax laws
The tax on the value of electricity output is chargeable in the historic territories from when the central government law was approved
Constitutional Court Judgments of January 17, 2019 and of February 14, 2019
On July 19, 2014 the Álava provincial law that approved the tax on the value of electricity output came into force. According to the provincial law, the effects of this law were valid retroactively from January 1, 2013, the date when the law creating the tax for Spain as a whole came into force.
The Constitutional Court examined whether this provincial law was potentially unconstitutional due to breaching the principle of legal certainty, by entailing retrospective application of tax law. The court concluded that, in this case, the retroactive nature of the provincial tax does not pose a problem because the historic territories have the power to set the legislation on their tax system, although they must reach an agreement with the central government and have regard to the central government’s general tax structure. In other words, Álava was required to include the tax on the value of electricity output in its tax system from when this tax came into effect for the rest of Spain, and therefore from that time it could be charged without posing problems concerning its retroactive application.
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