Tax Newsletter - January 2020 | Decisions

Corporate income tax

Notification of election of the neutrality regime by the Spanish-resident shareholder is mandatory where transferor and transferee companies are nonresident (in periods when the Revised Corporate Income Tax Law -TRLIS- was in force)

Central Economic-Administrative Tribunal Decision of December 3, 2019

The person with tax obligations (Spanish-resident individual) performed a share exchange in which they contributed shares in a French company to another French-resident company in exchange for shares in this company. On their personal income tax return they failed to tick the box relating to notification of election of the special regime for mergers, spin-offs, asset contributions and share exchanges (neutrality regime). They nevertheless did not report any capital gain on the described share exchange either, because they considered that the regime was applicable.

The tax authorities disallowed the neutrality regime, among other reasons, as a result of this failure to notify election of the neutrality regime.

TEAC recalled that, as a general rule, failure to notify election of the special regime is simply a formality that does not prevent the regime from being taken if the substantive requirements for claiming it are met. If, however, neither the transferor company or the transferee company are resident in Spain, notification by the Spanish-resident shareholder is an essential requirement, such that failure to make it is in itself enough to prevent the claiming of that regime.

It must be recalled that this decision refers to a period when the Revised Corporate Income Tax Law (TRLIS) was in force, and under that law the tax neutrality regime could be claimed following its election; in the current Law 27/2014 (LIS) the regime applies automatically, and it is necessary to elect not to claim it, if this is the case.

Rules characterizing tax legislation

Though the tax authorities cannot hold a simulated agreement null and void for civil or commercial law purposes, they can for tax purposes

Central Economic-Administrative Tribunal Decision of December 17, 2019

The director of a company that had ceased operating was held secondarily liable for a debt assessed for the company. This assessment was based on the fact that a transaction performed by the company was simulated (a sham) because it had been performed to obtain VAT refunds incorrectly; for that reason, the auditors took the view that the agreement documenting that transaction was null and void.

In an administrative appeal to a higher administrative body by the director of the collection department, she pleaded, among other arguments, that the agreement had to be held null and void in a court judgment not by the tax authorities, which do not have jurisdiction to do this.

Against this, TEAC argued that:

1. It is true that the tax authorities do not have the power to render an agreement null and void for civil or commercial law purposes, because this power is reserved for the courts.
2. This conclusion, however, is not an impediment to the tax authorities being able to render an agreement null and void for tax purposes only.
3. If this is so, the rendering of the agreement null and void must take effect for all parties involved in the agreement (under the principle of complete adjustment).

The court added that the finding of simulation will give rise to the agreement being absolutely null and void ab initio for tax purposes, due to the inexistence of cause, both in cases of absolute simulation and in cases of relative simulation.

Collection procedure

Successor is only liable for tax debts generated at conducting the business

Murcia Regional Economic-Administrative Tribunal. Decision of July 31, 2019

A personal income taxpayer contributed their lottery business to a company in which the taxpayer was the sole shareholder. In the tax authorities’ eyes, this gave rise to a capital gain/loss in respect of the difference between the market value and the cost price of the business. Because it was not reported, an assessment was issued increasing the taxpayer’s taxable income by the amount of the gain calculated by the auditors.

The tax authorities shifted liability for the personal income tax debt to the company that had acquired the business, as a result of the joint and several liability regime in article 42.1.c) of the General Taxation Law, whereby parties acquiring operations or economic activities are subrogated in respect of the tax obligations incurred by their former owner and arising from conducting those activities. This liability may be avoided or restricted by requesting a certificate containing the tax debts, penalties and liabilities arising from the conduct of the economic activities by the transferor.

Against this, the TEAR for Murcia concluded that:

1. The successor to an economic activity (the transferee of the business) may only be held liable for the tax debts arising from the conduct of that activity by the transferor.
2. The personal income tax debt arising from the contribution of the business to the company held liable does not originate from conducting the activity, instead from the transfer of the business. In fact, if the transferee had requested the certificate mentioned above from the authorities, the debt arising from that transfer would never have appeared on that certificate.

The DGT has therefore reiterated the TEAC’s conclusions in a decision of June 25, 2015.

Enforcement procedure

The maximum period for requesting enforcement of an administrative decision is 5 years

Central Economic-Administrative Tribunal Decision of December 5, 2019

A company received and paid a number of assessments from Ceuta port authority in respect of charges. The law determining those charges was later held to be unconstitutional. It therefore applied for the relevant refund, which was granted. After the decision upholding its petition had not been enforced in longer than four years, the company filed a written request for a refund of the amounts it had paid. Ceuta port authority concluded that the company's right to request a refund of incorrect payments had become statute-barred.

TEAC concluded in this decision that it is not lawful to characterize the petition of the appellant company as a refund of incorrect payments, but the request for enforcement of a final and favorable decision (the decision by the General Secretary for Transport), which is clearly distinct and qualitatively more intense as regards the strength of the right held by the beneficiary of this final decision.

Reiterating the interpretation contained in its decision of July 15, 2019, TEAC added that the tax legislation does not set out a specific time period for exercising the right to request enforcement of an administrative decision with tax content. Where there is a gap in the law of this type, general provisions of public law and articles of general law must be applied, which in this case allow a 5 year period for bringing all types of personal action that do not have a stipulated statute of limitations. Before Law 42/2015, which came into force on October 7, 2015, this period was 15 years.

Special application for judicial review of final decisions

An enforcement decision is a material document for the purposes of a special application for judicial review of final decisions if it includes new facts

Central Economic-Administrative Tribunal Decision of December 13, 2019

In an assessment by the tax authorities they failed to recognize eligibility for the personal and family allowance on the personal income tax return in respect of a specific degree of disability, which was confirmed by the TEAR for Galicia. In the subsequent application for judicial review, Galicia High Court partially set aside the TEAR’s decision, and recognized entitlement to this allowance. In enforcement of the judgment, on top of the allowance recognized by the High Court, the tax authorities also included a further amount in respect of healthcare costs.

Alongside the assessment, the taxpayer had received a penalty decision that he had not challenged within the allowed period and therefore became final . Following the enforcement decision for the High Court’s judgment, the taxpayer applied for a refund of the penalty and later lodged a special application for judicial review of final decisions against the penalty decision. This application was filed after three months had run from the enforcement decision.

The tax legislation provides that the term for lodging a special application for judicial review of final decisions is three months from when the person with tax obligations learned of the existence of a document that has material value in the proceeding.

TEAC concluded in this decision on the definition “material value” in relation to a document and on how that period must be calculated. And in doing so, it affirmed that:

1. The enforcement decision for the High Court’s judgment is a document with material value that justifies the filing of a special application for judicial review of final decisions, insofar as in this decision the tax debt is quantified and it contains facts or factual elements that are not contemplated in the enforced judgment and which may be material for examining the challenged penalties.
2. Although in this case the application was filed more than three months after the enforcement decision, it cannot be held that the term for filing the application was not met because within those three months the taxable person had requested a refund of the penalty, and therefore the tax authorities should have considered that the request for a refund was in fact a special application for judicial review of final decisions.

Requests for preliminary rulings

TEAC not allowed to submit requests for preliminary rulings to the CJEU

Court of Justice of the European Union Judgment of January 21, 2010 in case C-274/14

The CJEU has refused to accept TEAC’s authority to submit requests for preliminary rulings. Its decision was based on the fact that TEAC cannot be considered a court or tribunal because it fails to meet the independence criterion. It affirmed that:

1. The president and members of TEAC are not protected against external pressure, applied directly or indirectly besides which the appointment and separation of functions of the members of the courts do not present the necessary guarantees. All of this may cast doubt as to its independence.
2. That the impartiality requirement is not met. In other words, TEAC cannot be regarded to act as a third party with respect to the authority that adopted the decision that is being appealed to it. The organic and functional links between TEAC and the Ministry of Economy and Finance must be taken into account for these purposes.

The CJEU acknowledged that in the Gabalfrisa case (judgment of March 21, 2000 in cases C‑110/98 a C‑147/98) it held that economic-administrative tribunals did have the independence necessary to be regarded as courts or tribunals, but it accepted that this precedent has to be re-examined in light of its more recent cast law.

The CJEU recalled before closing that, in any event, even though they do not constitute courts or tribunals, economic-administrative tribunals do have an obligation to ensure that EU law is applied when adopting their decisions and disapply, if necessary, national provisions which appear contrary to EU law.

Personal income tax

Tax credit for investments in newly or recently created companies is claimable for capital increases through debt-for-equity swaps

Cantabria Regional Economic-Administrative Tribunal. Decision of January 29, 2019

The Personal Income Tax Law allows taxpayers to deduct 20% of “the amounts paid” in the tax period in respect of subscribing to shares in newly or recently created companies.

In the examined case, the tax authorities disallowed the taxpayer's right to claim that tax credit in relation to a capital increase through a debt-for-equity swap, because the interpretation of the Directorate General for Taxes (DGT), as stated in binding resolution V3269-16, of July 13, 2016, was that the swapped debts cannot be regarded as “amounts paid” in respect of subscribing to shares.

The TEAR for Cantabria, by contrast, held that the expression “amounts paid” employed by the Personal Income Tax Law includes debt-for-equity swaps and allowed the tax credit to be claimed in relation to transactions of this type.