Tax Newsletter - June 2019 | Resolutions by the Directorate General of Taxation

Corporate Income Tax

The conversion of an agricultural processing company into a limited liability company does not stop the clock on the holding period for the company's shares

Directorate General for Taxes. Resolution V0577-19, of March 19, 2019

A taxpayer requested a ruling in relation to converting various agricultural processing companies (owned by two individuals) into limited liability companies and later contributing the shares to a newly created holding company. The request concerned whether the tax neutrality regime could be claimed for this nonmonetary contribution. Specifically, whether the minimum holding period was deemed to be met for the contributed shares.

The Directorate General for Taxes (DGT) explained that the neutral regime may be claimed because the starting point for the requirement to own the shares uninterruptedly for a year is when the agricultural processing companies were originally acquired, because the change of legal form does not alter its corporate income tax regime.

Corporate Income Tax

An indemnity payment expense is not deductible if it is recognized after it has become statute-barred

Directorate General for Taxes. Resolution V0578-19, of March 19, 2019

An entity owned agricultural land which it leased as such. Following certain types of urban development work the land became urban land, which gave rise to termination of the rural land lease agreements. The company transferred the building rights to a developer in 2007. In these cases, the Valencia autonomous community legislation grants the previous lessees of rural land the right to be indemnified. After payment of the indemnification had been claimed by the rural lessees, the parties reached (years later) an agreement in principle on an amount without having to take the case to court. It was asked in the request whether the indemnification payments are tax deductible in the period when the out of court agreement is reached.

The DGT concluded, in line with the interpretation adopted by the Spanish Accounting and Audit Institute (ICAC), that the indemnification expense should have been recognized in 2007, when the obligation to indemnify arose and, therefore, it was likely that an outlay of funds by the entity took place, regardless of whether the out of court agreement was reached years later.

The failure to record this expense in 2007 is an accounting error which should have been corrected by recognizing a liability against reserves. From a tax standpoint, the expense should have been included in the tax base through a negative adjustment for tax purposes (in other words, without the need to apply for a correction in relation to 2007), but only if the late recognition of the expense does not result in lower tax than would have been payable if the expense had been recognized in the period when it arose (2007).

The DGT added that the potential effect of the statute of limitations must be taken into account here, because if an expense that arose in a statute-barred year is recognized in a later period, the expense would not be able to be deducted in the year it was recognized.

Personal Income Tax

Income obtained from a capital reduction with repayment of contributions must be reported in the period when the transaction is performed not when the transaction is registered

Directorate General for Taxes. Resolution V0597-19 of March 20, 2019

A limited liability company made two capital reductions with repayment of contributions to its shareholders in 2017, but the registration of those transactions at the commercial registry took place in a later tax period.

The DGT recalled that, according to the Supreme Court’s case law, the registration of a capital reduction at the commercial registry does not give rise to the existence of a right, so the income obtained from that transaction must be recognized in the year in which it was performed not the year it was registered.

Personal Income Tax

Dividends paid out of a tax refund to a holding company are exempt

Directorate General for Taxes. Resolution V0547-19 of March 13, 2019

On its 2006 corporate income tax return a company claimed the regime for entities of a reduced size. In 2009 it applied for correction of its self-assessment because it considered it should have claimed the holding companies regime, which entitles it to a refund of the excess tax paid. After that application was denied by AEAT, the TEAR, and TEAC, the National Appellate Court upheld the appeal and AEAT refunded the relevant amount together with late-payment interest.

Now the company wanted to distribute the refunded amount among its shareholders (all individuals) as a dividend and asked whether it was eligible for the exemption for the distribution of income obtained in years when the special holding companies regime was applicable.

The DGT recalled that the aim of that exemption is to avoid double taxation, because the dividends relate to income that has been taxed at the company under the special holding companies regime. It explained, additionally, that the refunded amount relates to excess tax which, had it not been charged when it was (in 2006, when the company was taxed incorrectly), would have caused a higher amount of distributable income that would have been exempt.

As a result, it concluded that the exemption applies to the distribution of income relating refunded tax.

Inheritance and Gift Tax

Legally separated but not divorced spouses fall into Group II for inheritance and gift tax purposes

Directorate General for Taxes. Resolution V0698-19 of March 28, 2019

An individual was going to give a property to their spouse, the couple are legally separated but not divorced. The request concerned which family relationship group applies to determine the multiplier to be used to calculate the tax liability.

The DGT explained that, under article 85 of the Civil Code, a marriage is only dissolved by reason of the death of either spouse or by reason of divorce. In other words, the separation of spouses does not terminate the relationship that exists between them.

Since the inheritance and gift tax legislation makes no distinction, both separated and non-separated spouses must be included in family relationship Group II.

Real Estate Tax

Exemption from real estate tax for not-for-profit entities is claimable for properties leased to third parties

Directorate General for Taxes. Resolution V0534-19 of March 13, 2019

A request was submitted to the DGT in relation to a not-for-profit entity owning a property that it leases to a third party which uses it to operate a hotel business. The revenues obtained from that rental arrangement are used by the not-for-profit entity for its foundational purposes. The request concerned whether that property is allowed to benefit from the real estate tax exemption contained in the legislation on tax incentives for patronage.

The DGT recalled that the real estate tax exemption is claimable for real estate assets owned by not-for-profit entities, unless they are used for business operations not exempt from corporate income tax. In other words, the exemption is only claimable where the activities are carried on to achieve the entity’s specific purpose or aim.

Therefore, the real estate tax exemption is applicable, regardless of the use that the lessee makes of the property.