Tax Newsletter - March 2020 | Judgments

Freedom of establishment

Progressive tax on turnover that mainly affects subsidiaries of large foreign companies is not contrary to the freedom of establishment

Court of Justice of the European Union. Judgment of March 3, 2020. Cases C-75/18 and C- 323/18

The court analyzed whether the freedom of establishment is compatible with the Hungarian taxes on turnover in the retail trade and telecommunications sectors, bearing in mind that the foreign taxable persons pay according to some tax rates that are higher than in the case of taxable persons under domestic ownership (which can even be exempt).

In this judgment, the CJEU held that:

1. Progressive taxation based on turnover is acceptable.
2. It constitutes a criterion of differentiation that is neutral and, moreover, turnover constitutes a relevant indicator of a taxable person’s ability to pay.
3. That leads de facto to a situation in which national persons or entities bear less tax than nonresident persons. But this difference in treatment cannot merit, by itself, categorization as discrimination, because the law does not distinguish between taxable persons according to the place where they have their registered office, but exclusively according to their turnover.
4. Thus, the freedom of establishment is not contrary to the legislation that establishes both taxes.

The court analyzed other issues of interest related to the main issue:

1. In the case relating to the tax on turnover in the retail trade sector, the referring court asked whether legislation that granted a tax exemption to some operators in the market was compatible with the principle of the prohibition of State aid.
         
   The Court ruled that this referred question was inadmissible because, although the existence of an exemption that is only enjoyed in practice by certain taxpayers could be classified as State aid, the tax is a general tax that is not specifically allocated to the funding of a tax advantage for which a particular category of taxable persons qualify.
2. With respect to the case relating to the tax on turnover of telecommunications operators, the referring court asked whether that tax can be deemed incompatible with the VAT Directive.
       
   The CJEU recalled that in order to conclude that a tax on turnover is levied on the movement of goods and services and on commercial transactions in a way that is incompatible with the Directive, the four characteristics of VAT must be verified: (i) it applies in general, (ii) it is determined proportionally to the price charged, (iii) it is charged at each stage of the production and distribution process, and (iv) existence of a system for deducting the amounts paid in preceding stages.
        
   According to the Court, the tax at issue does not display the third and fourth characteristics of VAT, as the tax is not received in each stage of the production and distribution process and there is not a mechanism established similar to that of the right to deduct VAT. Therefore, the tax is not incompatible with the VAT Directive.

 

Freedom of establishment

Legislation preventing deduction of tax losses by a company that transfers its tax residence to another Member State is not contrary to the freedom of establishment

Court of Justice of the European Union Judgment of February 27, 2020. Case C-405/18

A Dutch company incurred losses in the Netherlands. After establishing a branch in the Czech Republic, it transferred its place of effective management and its tax residence to that territory, but it retained its registered office in the Netherlands. After the transfer, it applied to the Czech tax authorities for deduction of the losses incurred in the Netherlands, which was denied on the ground that neither Czech legislation nor the convention for the avoidance of double taxation in force provided for the cross-border transfer of a tax loss.

The CJEU concluded, firstly, that transfers of place of effective management from one State to another are included within the scope of the freedom of establishment. However, it held that the Member State to which a company transfers its place of effective management cannot be obligated to consider the losses incurred before that transfer, relating to tax periods in which that Member State lacked tax jurisdiction with respect to that company. Moreover, although the companies resident in that Member State that have incurred losses do have a right to use them, this case does not entail discrimination contrary to European Union law because the situations are not comparable.

 

Freedom to provide services

Legislation establishing a more onerous penalty regime for providers established in other Member States is not contrary to the freedom to provide services

Court of Justice of the European Union. Judgment of March 3, 2020. Case C-482 /18

The Hungarian tax authorities ruled that an entity carried on an activity that fell within the scope of the law relating to the tax on advertising, so it should have registered for that activity and complied with certain disclosure obligations. As a consequence of the failure to comply with the legislation, a fine was imposed. In the following days, four new fines were imposed, each of which was equal to three times the amount of the fine previously imposed.

The CJEU ruled on various questions referred by the national court:

1. Firstly, the court held that the fact that providers of services already registered for tax purposes in Hungary are exempt from the obligation to register and disclose information for purposes of that tax is not a difference in treatment capable of constituting a restriction on the freedom to provide services, given that the aim of the law is for those who are taxpayers for the tax to be registered for tax purposes in Hungary.
2. Secondly, it was asked whether the system of penalties is contrary to the principle of freedom to provide services, bearing in mind that the system of penalties in relation to providers established in Hungary for breach of similar registration and disclosure obligations gives rise to fines that are significantly lower and are not increased in the same proportions or within such short periods of time.
            
   The court held that, strictly speaking, that system of penalties applies without distinction to all taxpayers who fail to comply with their obligation to submit a tax declaration, irrespective of the Member State in which they are established. However, indeed, the form of imposing the fines is more onerous in the case of providers not established in Hungary. For that reason, it must be concluded that the system of penalties concerned constitutes a restriction on the freedom to provide services that cannot be justified by the need to preserve the integrity of the Hungarian tax regime, or by reasons based on ensuring the effectiveness of fiscal supervision and the effective collection of tax.

 

Personal income tax

The statute of limitations for the right to audit the exemption for reinvestment in the principal residence starts to run from breach of the conditions for claiming it

Supreme Court. Judgment of February 26, 2020

The Personal Income Tax Law allows an exemption for the capital gain on the sale of a principal residence, provided that the proceeds from the sale are reinvested in acquiring a new principal residence within a maximum time period that ends two years after the sale of the original principal residence. If the requirements are breached, the law specifies that the taxpayer must file an additional return reporting the capital gain that was initially exempt in the year of sale.

It was asked when the statute of limitations on the tax authorities’ right to assess the tax debt starts to run: whether (a) on the day the statutory period for filing the return for the year in which the exemption was claimed (the year of the sale) ends, or (b) the day the period for filing the additional return due to breach of the requirements for the exemption ends.

The Supreme Court concluded that the statute of limitations does not start to run until the period for filing personal income tax return for the year in which the breach occurred (the period determined by the law for filing the additional return) ends, because, until then, the tax authorities cannot take any step aimed at issuing an adjustment tax assessment for the claimed exemption.

 

Stamp tax

Changes to mortgage loans that affect more than just the interest rate or the repayment period are exempt from stamp tax

Supreme Court. Judgments of March 4 and February 26, 2020

The transfer and stamp tax legislation allowed an exemption for mortgage loan novation deeds in which the terms and conditions of the interest rate and/or repayment period are changed. As we previewed in our Alert of March 9, 2020, the Supreme Court reiterated in these two judgments the interpretation determined in its judgment of February 13, 2019, concluding that the stamp tax exemption allowed for changes to mortgage loans that affect the interest rate or the repayment period is claimable even if other clauses are changed in the deed.

In addition, the Court again insisted that the taxable amount for novations subject to stamp tax should be limited to the valuable content of the clauses that are changed and does not necessarily include the whole of the outstanding mortgage debt. In this regard, and as a new element determined in the judgment, the Supreme Court seems to refer also to the tax authorities’ obligation to calculate, in these cases, what this specific valuable content (and the relevant taxable amount) should be for each specific change. Otherwise, they would not be able to demand payment of the tax.

 

Tax on economic activities

The assignment of categories to the streets of a municipality must be properly supported

Asturias High Court. Judgment of October 14, 2019

The liability for the tax on economic activities is determined using, among other elements, a location multiplier that depends on the category assigned to the street where the economic activity is conducted.

In the case that gave rise to this judgment, an entity had challenged an assessment of the tax on economic activities on the ground that no reasoning was provided supporting the category assigned to the street where it conducted its activity. Asturias High Court confirmed that the annex to the fiscal ordinance on the tax that contained the categories of the streets of the municipality was null and void after it found that they were not properly supported.

 

Tax elections

Not claiming a tax benefit on a return does not imply a tax election

Basque Country High Court. Judgments of October 10 and 16, 2019

In the cases examined in these judgments, the taxpayers filed their corporate income tax returns within the statutory time period, but they did not enter on those returns the tax credit for research and development activities, for which they met the statutory requirements.

After the voluntary filing period had ended, and after they noticed the error, they applied to correct their returns so that could claim the tax credit. The provincial tax authorities for Guipúzcoa rejected the application on the grounds that the failure to claim the tax credit on the return filed in the voluntary period implied a tax election had been made that could not be changed after that period ended. The Guipúzcoa Provincial Economic-Administrative Tribunal confirmed this view.

However, the Basque Country High Court took the opposite view and noted two important considerations:

1. For an election to exist, there must be a formal and express statement by the taxpayer in favor of one of the alternatives established in the law. Therefore, an election cannot be deemed to have been made expressly or impliedly where the taxpayer does not enter on its tax return a certain tax benefit to which it is entitled.
2. The law does not establish a period for making tax elections, instead, specifies rules on modifying and rectifying elections not made. In view of this distinction, there is nothing to prevent the taxpayer, within the period for correcting the return, from requesting to be allowed to complete the return in order to enter or claim a tax credit that it had left out of the original return.

 

Management procedure

An assessment arising from conducting an incorrect management procedure is null and void and does not toll the statute of limitations

Supreme Court. Judgment of February 6, 2020

At issue was whether the incorrect use of a management procedure (in this case, the data verification procedure rather than the limited audit procedure) amounts to a case that is null and void ab initio or simply voidable, for the purposes of determining whether or not the tax authorities’ right to assess the tax debt is statute-barred.

The Supreme Court confirmed that assessments issued in incorrect procedures are null and void by operation of law and, therefore, do not toll the statute of limitations.

The court referred to the rule determined in the judgment of July 2, 2018 (cassation appeal 696/2017), summarized in our Tax Alert 13-2018, and recalled that the data verification procedure has a limited scope, which is why its use in cases where it does not legally apply renders the assessment null and void by operation of law.

 

Inspection procedure

Assessments on an agreed basis cannot be used as independent proof, but rather as a means to confirm the other items of proof

Supreme Court. Judgment of February 17, 2020

At issue was whether an assessment on an agreed basis signed by a taxpayer with a tax authority regarding a given tax can be asserted vis-à-vis another tax authority in relation to another tax as proof of the facts on which it is based and the taxpayer’s intention.

It should be recalled that assessments on an agreed basis can be signed in order to:

1. Specify an undetermined legal concept in an exceptional situation.
2. Substantiate certain facts over which the taxpayer and the authorities disagree as to their truth or existence.
3. Quantify figures, elements or characteristics relevant to the public financial obligation that is sought from the taxpayer.

In short, assessments on an agreed basis try to introduce a contractual mechanism for ending tax procedures, in order to avoid the situation of uncertainty that arises when those procedures relate to cases that involve particular difficulty when it comes to applying the rule to the specific case, or to estimating or valuing elements of the tax obligation that have an uncertain quantification.

In keeping with this, the Supreme Court concluded that assessments on an agreed basis do not have to serve as proof of their contents, but rather they should be evaluated in the same way as any other proof and, in particular, as an element to confirm or strengthen the plausibility of the other items of proof produced by the taxpayer.

 

Review procedure

An appeal cannot be rejected if the taxpayer has followed the system of appeals indicated by the tax authorities in the assessment

Catalan High Court. Judgment of October 14, 2019

In the case that gave rise to this judgment, the tax authorities had issued an assessment relating to the tax on increase in urban land value in which they incorrectly indicated which appeals could be filed against the assessment. As a result of this error, the appellant resorted directly to the judicial review jurisdiction, without first exhausting the administrative jurisdiction. For this reason, the lower court rejected the appeal.

The Catalan High Court ruled in favor of the appellant and ordered that the proceedings be rolled back to the lower court. Because the court considered that the rejection of the appeal that had been ordered by the lower court entailed saddling the taxpayer with errors made by the tax authorities.