Tax Newsletter - April 2020 | Judgments

Corporate income tax

The only requirement to claim the regime for companies of a reduced size was the net revenues threshold (under the former Corporate Income Tax Law)

Supreme Court. Judgment of March 11, 2020

A company engaged in property leasing claimed the regime for companies of a reduced size in the fiscal years between 2008 and 2011. The tax authorities concluded that the regime could not be claimed in those years because the company had not carried on any real economic activity, since it had not been evidenced that it had premises for carrying on its activity and at least one person employed full time under an employment contract.

The Supreme Court examined the requirements that must be met by a company engaged in property leasing to be eligible for the tax incentives for companies of a reduced size under the former Corporate Income Tax Law (TRLIS), then in force. It examined in particular whether:

• those incentives could be made conditional on the existence of a real economic activity, within the meaning of article 27 of the Personal Income Tax Law, not laid down as a legal requirement at that time (although it is in the current law); or
• it is enough for the net revenues figure to be below the legally specified limit, the only legal requirement laid down in the TRLIS.

The Supreme Court confirmed its earlier theory (in a judgment delivered on July 18, 2019, analyzed in our August-September 2019 Newsletter) by concluding that in the examined years the regime for companies of a reduced size could not be made conditional on the existence of a real economic activity (within the meaning of the personal income tax legislation), because the TRLIS did not expressly contain this requirement.

 

Personal income tax

Benefits under a group insurance policy taken out before 2007 and tacitly renewed annually qualify for reductions under the transitional regime

Supreme Court. Judgment of March 3, 2020

The Personal Income Tax Law in force until December 31, 2006 characterized retirement and disability pensions under group insurance policies funding companies’ pension obligations as salary income, with the right to certain reductions if they were received in a lump sum. The current law has retained that characterization but does not allow reductions of this type, although it contains a transitional arrangement (transitional provision eleven), allowing the reductions to continue for any taxpayers receiving benefits under group insurance policies taken out before January 20, 2006.

In the case examined in this judgment, the group insurance policy was renewed annually. It was considered whether this annual renewal entails an extension of the original contract (which would allow the transitional regime to be claimed) or, conversely, involves an annual termination novation, which would prevent entitlement to the regime.

The court concluded that each specific case needs to be examined to conclude as to whether the renewals terminate or amend the contracts. It found that the specific case under examination involved an annual amendment novation, not altering the essential terms of the contract, which allows the original contract date to be kept, and with it, the right to the reductions under the transitional arrangement.

 

Personal income tax

Directors can claim exemption for work performed abroad

National Appellate Court. Judgment of February 19, 2020

The personal income tax rules allow an exemption for work performed abroad. The DGT has been finding that this exemption is only available for anyone obtaining salary income under an employment relationship, in other words, that it is not claimable by anyone having a contract for services. Therefore, the exemption cannot be claimed by the directors of any type of entity. This even applies to the income received by directors for their executive duties not simply for belonging to the managing body, under the prevailing relationship theory.

In the case examined in this judgment, the tax authorities had disallowed the exemption on the basis of that theory.

The National Appellate Court, however, held that the interpretation supported by the tax authorities was not correct for the following reasons:

1. The aim of the rule is to encourage international deployment of human capital, by reducing the tax pressure on Spanish residents who temporarily relocate to work abroad.
2. The article specifies that the following is exempt: “salary income for work performed abroad". Therefore, the rule does not exclude from its scope any of the types of salary income defined as such in the law itself, including salary income under a contract for services (provided the income does not qualify as income from economic activities) and, specifically, the income of directors.
3. Therefore, if the other requirements laid down for the exemption in the rule are met, directors cannot be disallowed from claiming the exemption.

It must be remembered that the Supreme Court admitted appeal number 1990/2019 in a decision rendered on November 21, 2019, in which this issue will be examined although related to Spanish resident directors’ participation in nonresident companies, so the case to be examined in that appeal is not the same as that analyzed by the National Appellate Court. The specific question raised in the Supreme Court case is whether the exemption “can be claimed in respect of income for management and control associated with participation in the board meetings of a subsidiary abroad or, conversely, those activities do not qualify as effective work or therefore give entitlement to the exemption under the article mentioned above”.

 

Personal income tax

Rejection of exemption for a severance payment must be based on solid and consistent evidence, even if it is indicative

National appellate court judgment of January 22, 2020

In a tax audit on a company, the auditors recharacterized a dismissal as termination by mutual agreement, which meant rejection of the exemption included for calculating the tax withheld from the severance paid by the company.

The tax authorities’ reassessment was based, as has become customary, on certain items of circumstantial evidence, which the National Appellate Court found insufficient in this judgment.

Namely, it held that the fact of the letter of dismissal and acceptance of the severance having simultaneous dates or of the agreed severance being below the statutory amount in the Workers’ Statute is not sufficient evidence of the existence of a mutual agreement. This, in the court’s view, may result from a negotiation over the amount of severance (not over the dismissal) aimed at reducing the uncertainty, in particular, of the dismissed worker.

The court underlined, moreover, that the employee's retirement age was a long way off and that, although various dismissals with similar characteristics occurred at the company around the same time, the auditors only saw fit to reassess one of them.

 

Personal income tax

Capital gains derived from awarded proceeding costs have to be reduced by defense costs

Madrid High Court. Judgment of December 02, 2019

The tax authorities took the view that the proceeding costs awarded to an individual should be taxed for personal income tax purposes as a capital gain in the general taxable income.

In this judgment, Madrid High Court held that, to calculate that capital gain, the awarded costs should be reduced by the amount of suitably supported expenses incurred in the proceeding (i.e. invoices of counsel and court procedural representative). Finding otherwise would mean taxing fictional income and breaching the aim sought by the award of costs, which is simply full recovery of the expenses incurred in the proceeding by the winning party.

It must be recalled that Murcia's Regional Economic-Administrative Tribunal had already concluded this in a decision delivered on January 11, 2019; an interpretation that is along the lines of that supported by the  Ombudsman in his Recommendation of July 18, 2017 (rejected by the tax authorities).

 

Nonresident income tax

The income specified in the parent-subsidiary directive does not apply for companies formed in Gibraltar

Court of Justice of the European Union. Judgment of April 2, 2020. Case C-458 /18

A Bulgarian company paid out dividends to its parent company, formed in Gibraltar, without withholding or assessing any tax at all because it considered that the exemption allowed in the parent-subsidiary directive was applicable. The Bulgarian tax authorities reassessed the tax position of the company that paid out the dividends, because they considered it should have withheld tax at source on the dividends, because the parent company was a nonresident foreign company in a member state.

The Bulgarian company considered that its parent company met the requirements to be treated in the same way as a company formed in the United Kingdom, and therefore filed a challenge against the assessment. The requesting court asked, in essence, whether the phrases “companies incorporated under the law of the United Kingdom” and “corporation tax in the United Kingdom” as used in the parent-subsidiary directive include, respectively, companies incorporated in Gibraltar and the tax on corporate income in Gibraltar.

The CJEU concluded that the parent-subsidiary directive must be interpreted to the effect that the phrases “companies incorporated under the law of the United Kingdom” and “corporation tax in the United Kingdom” appearing in it do not refer to companies incorporated in Gibraltar and subject to tax on corporate income in Gibraltar. Specifically, the CJEU rejected their consideration as such on the basis that the UK government clarified that, in its internal legal system, companies incorporated under its law only include companies considered incorporated in the United Kingdom, not companies incorporated in Gibraltar.

 

VAT

Transfer by a financial institution of shares in other companies to fulfill a legal obligation is not an extension of the main financial activity, and therefore does not affect the general deductible proportion

Supreme Court. Judgment of March 2, 2020

The court examined the case of a financial institution established in the Spanish VAT area, owning shares in two financial institutions established in Andorra (a third area for VAT purposes). To fulfill the legal obligation to reduce its legal ownership interest to 51% and to combine the group's financial business in Andorra, it transferred its investment to third parties also domiciled in Andorra.

The VAT Law (article 104.Three.4) excludes “non-habitual” financial transactions from the calculation of the general deductible proportion, whereas the term used by the Directive in article 174.2 for the exclusion of such transactions is if they are “ancillary”.

The Supreme Court (in line with a judgment delivered on October 9, 2015 in cassation appeal 889/2014) concluded as follows:

1. Non-habitual and ancillary do not have the same meaning. Non-habitual refers to a transaction that is infrequent or isolated; whereas ancillary refers to it being secondary to the main activity. Therefore, a transaction may be non-habitual and yet form part of the main activity. Whereas a habitual transaction may not be part of the main activity and therefore be ancillary.
2. Therefore, the financial transaction at issue is indeed non-habitual, in that it is infrequent and isolated. For the purpose of calculating the general deductible proportion under the European rules (applicable directly and with priority), however, it needs to be examined whether the transaction is ancillary.
            
   Although the directive does not define the meaning of ancillary transaction, the CJEU has done so in various judgments. According to the CJEU, an ancillary activity is one that is not a direct, permanent and necessary extension of the financial activity of the taxable person.
3. In the examined case, it was observed that, through the sale of shares, the bank as a whole was transferred to achieve the aim of fulfilling a legal obligation and combining the Group’s financial business in Andorra. This transaction, in short, did not involve an extension of the main financial activity, nor did it entail a significant use of goods and services in terms that, according to the CJEU’s case law, would preclude the ancillary nature of the transaction, which determines that the transaction cannot be included for the purpose of determining the general deductible proportion.

 

Transfer and stamp tax

A property value included in a mortgage appraisal report cannot be used to identify its actual value

Valencia High Court. Judgment of January 20, 2020

The tax authorities reassessed the transfer and stamp tax on the sale of a property due to considering that the taxable amount should have been the property value as stated in the mortgage appraisal report.

Valencia High Court held, however, that the actual value of a property cannot necessarily be identified from the value determined for the purpose of applying for a mortgage, because this appraisal is made with a specific aim.

 

Transfer and stamp tax

For the audit of a property value to be valid, the tax authorities have to evidence that they made at least one attempt to visit the property

Valencia High Court. Judgment of December 10, 2019

In this judgment the court voided an assessment resulting from an audit of reported values on the basis that the authorities’ expert report had been drawn up without visiting the property.

The need to visit the property that is being audited in relation to its reported value continues to be the subject of debate and has given rise to differing interpretations by the Spanish courts. The dispute could be settled by the future judgment that will be delivered by the Supreme Court in cassation appeal number 5353/2019 which was admitted in a decision dated March 6, 2020.

 

Tax on increase in urban land value

Deeds are valid proof to evidence a loss in value of a piece of land, even if the prices of the various properties are not itemized

Madrid High Court. Judgment of December 10, 2019

In the case examined in this judgment an assessment of the tax on increase in urban land value due on the sale of three properties had been challenged. The taxpayer provided the deeds for joint acquisition and sale of the properties as proof of the loss in value of the land relating to those properties, and therefore, of the unlawfulness of the appealed administrative decision.

However, the purchase deed did not itemize the prices allocated to the individual properties, all located on the same street and having the same use as offices. Neither deed, moreover, separated the prices of the land from those of the buildings. For these precise reasons, the tax authorities rejected the value of the provided deeds as evidence.

Finding in favor of the taxpayer’s interpretation, Madrid High Court allowed the provided deeds as evidence indicating the fall in value of the land; because the tax authorities did not provide any proof refuting that it had occurred, and confirmed that the assessment was unlawful.

 

Tax procedure

After an assessment has been voided on procedural grounds, the tax authorities must roll back procedure and render a new assessment decision, without being able to issue “interim assessments”

Madrid High Court. Judgment of November 4, 2019

The facts in the case examined in this judgment were:

1. The taxpayers filed an inheritance and gift tax return for a mortis causa transfer which included various properties.
2. Madrid autonomous community initiated an audit to examine the return, and issued an assessment based on higher values than those reported by the taxpayers. The taxpayers paid the debt determined in the assessment.
3. In a subsequent economic-administrative claim the administrative assessment was voided because, in the tribunal’s view, the audit of the reported values of the properties had been conducted without the appropriate safeguards. It nevertheless ordered a rollback of procedure.
4. In its enforcement of the decision, the Madrid autonomous community:

• acknowledged the taxpayers’ right to a refund of the amount they had paid plus late-payment interest;
• issued a new provisional assessment based on the asset values originally reported by the taxpayers;
• offset the acknowledged refund against the debt calculated in the earlier provisional assessment.
• ordered, lastly, rollback of the tax audit to before the examination of the reported values of the real estate assets.

In short, the issued provisional assessment was characterized as an “interim assessment” for any assessment resulting from the new audit.

Madrid High Court concluded that the tax authorities had not acted consistently with the law to the extend that, where a tax assessment is voided by a decision or judgment and a rollback of procedure is ordered, the tax authorities have to void every decision that is affected by the voided assessment, and issue a new lawful assessment resulting from a new examination or audit procedures, but they cannot issue “interim assessments” for that audit.

 

Review proceeding – ‘res judicata principle’

A national court is not required to apply internal procedural rules that confer finality under the res judicata principle on a court judgment contrary to European law

Court of Justice of the European Union. Judgment of March 04, 2020. Case C-34 /19

An Italian company challenged an assessment issued by the Italian tax authorities in relation to a fee, arguing that the fee was contrary to EU Law. The Italian tribunal that heard the case at first instance dismissed the challenge. The taxpayer filed a challenge with the Italian Council of State, which was dismissed and the dismissal judgment became final.

Later, the taxpayer brought civil proceedings at Corte d’appello di Roma (Court of Appeal, Rome) because it considered that the Italian state had not interpreted EU law correctly. The Corte d’appello di Roma acknowledged that the conclusion reached in the final judgment by the Council of State was incorrect and that an infringement of EU law had taken place. However, it did not order a refund of the sums incorrectly paid as a result of that decision by the Corte d’appello di Roma. For this reason, the taxpayer filed, a second time, a refund application for the sums paid over to the court that had heard the case at first instance. It was in this proceeding that various requests for a preliminary ruling were submitted to the CJEU.

Particularly notable was the request concerning whether EU law must be interpreted as requiring a national court to disapply domestic rules of procedure conferring finality on a decision, where that would make it possible to remedy an infringement of a provision of EU law. The CJEU concluded as follows:

• In the absence of EU law in this area, the system implementing the principle of res judicata is a matter for the laws of the member states, with observance of the principle of equivalence and the principle of effectiveness.
• In order to ensure both stability of the law and legal relations and the sound administration of justice, it is important that judicial decisions which have become definitive after all rights of appeal have been exhausted or after expiry of the time limits provided for in that connection can no longer be called into question. Accordingly, EU law does not require a national court to disapply domestic rules of procedure conferring finality on a judgment under the principle of res judicata.
• The CJEU underlined, however, that this conclusion does not prevent the parties concerned from being able to bring liability action against the state to obtain legal protection of their rights under EU law.