Tax Newsletter - March 2020 | Resolution requests

Corporate income tax

The absorption of inactive companies may be found to have been performed on valid grounds, depending on the circumstances

Directorate General for Taxes. Resolution V0084-20 of January 17, 2020, and resolution V0203-20 of January 30, 2020

Each of the resolution requests inquired about a restructuring transaction whereby operating entities would absorb inactive entities.

The DGT concluded as follows:

1. To consider that a merger is performed on valid economic grounds, it must benefit the conducted activities, by improving the capital structure of the absorbing entity and enabling the activities carried on until then through several entities to be enhanced by being carried on at a single legal entity.
2. The mere fact that the absorbed companies are inactive does not preclude application of the special tax regime. However, if the absorbed companies, which are inactive, have tax loss carryforwards as their one and only asset, it could be considered that the merger is performed for the only purpose of achieving a tax advantage. In contrast, if the absorbed entities have certain assets that may enhance the absorbing entity’s economic activity, it may be considered that the transactions are based on economically valid grounds.

Corporate income tax

Lease expense is deductible even if the revenue is exempt in the hands of the lessor

Directorate General for Taxes. Resolution V0054-20, of January 14, 2020

An entity is the lessee of certain properties owned by an association that applies the special foundations regime. The association’s revenue is therefore exempt. The entity and the association are related parties.

It was asked whether the lessee’s expense is deductible under the rules contained in article 15.j) of the Corporate Income Tax Law. Under that article, expenses arising from transactions performed with related persons or entities which, as a result of a different tax classification at that person or entity, do not generate revenue or generate revenue exempt from tax or subject to tax at a nominal rate of less than 10%, are not treated as tax deductible.

The Directorate General for Taxes concluded that, because the transaction is a lease transaction for both parties, that is, two different classifications do not exist for the transaction, the mentioned article does not apply.

In any event, the DGT recalled that, since it is a related-party transaction, the rules on the pricing of these types of transactions must be taken into consideration.

Personal income tax

Worker’s reinstatement means returning the received severance and recovering the paid tax by filing a correction return

Directorate General for Taxes. Resolution V0075-20 of February 15, 2020

A worker was fired by a company in July 2017 in an objective dismissal, whereupon he received the mandatory severance under the Workers’ Statute for this kind of dismissal. After the worker filed an individual dismissal claim, the labor court held that the dismissal was unjustified in December 2017, ordering the company to pay the amount of severance for the unjustified dismissal or, alternatively, to reinstate the worker and pay the wages he had not received. The company appealed the judgment and the worker filed a petition for provisional reinstatement. In an order made in April 2018, the labor court ordered the company to reinstate the worker and to pay back wages. The back wages were paid in April 2018 and in May of the same year the company notified the social security authorities of the worker’s hiring, with effect from July 2017.

The DGT concluded in this resolution that:

1. Under the labor legislation, in cases where the worker is reinstated, the worker must return any previously received severance, once the judgment becomes final. The worker must bring his tax situation into compliance by filing an application to correct his tax return for the year in which he received and reported the severance pay (in this case, 2017).
2. The back wages must be recognized in full in the tax period in which the court order recognizing those wages became final (2018).

Inheritance and gift tax

A gift of properties to nonresidents benefits from the legislation of the autonomous community where the property is located; a gift of cash benefits from the legislation where the money was located for the highest number of days over the last five years

Directorate General for Taxes. Resolution V0149-20 of January 21, 2020

The requesting party resident in Luxembourg is going to receive a gift located in Madrid and some cash; the donors are his parents.

According to the DGT:

1. A gift of real estate located in Spain to a non-Spanish resident recipient is taxable in Spain under nonresident income tax rules. In contrast, a gift of cash by a Spanish-resident individual to a nonresident recipient will be taxable in Spain under nonresident income tax rules only if the money is located in Spain at the time of the gift (which will be the case if the gift is made by means of a transfer from the parents’ own checking account open at a branch of a bank located in Spain to their son’s checking account, that is, if the money leaves Spain in the recipient’s name).
2. With respect to the gift of the property, since it is located in Madrid, the nonresident recipient will be entitled to apply the legislation of the Madrid autonomous community (i.e., he will be able to take the relief allowed in that legislation for gifts from parents to children).
3. With respect to the gift of the money, if it is located in Spain at the time of the gift, the legislation of the autonomous community where the money has been located for the highest number of days in the immediately preceding five years (counted from date to date) will apply to the gift.

Wealth tax

Impact of cash from sale of shares on family business exemption

Directorate General for Taxes. Resolution V0037-20 of January 13, 2020

Until 2017, the assets of company A consisted primarily of shares representing ownership interests higher than 5% in eleven companies that carried on an economic activity and that were held for the purpose of administering and managing those shares. The company had an organization of human and material resources for the purpose. At the end of 2018, the company transferred its shares in seven of the eleven investees, after which its assets consisted of cash and mutual funds (90%) and shares in the other four entities (10%). This composition of assets was maintained in 2019.

For the purposes of applying the family business exemption in relation to the shareholders of the entity, the Directorate General for Taxes explained the following interpretations:

1. The cash and the mutual funds from the sale of shares in entities that carry on an economic activity and that make up 90% of the assets of company A will not be computed as assets or securities not used in the business in the analysis of whether the shares in that entity meet the requirements to qualify for the exemption from wealth tax (a view which might not be fully in line with the Supreme Court’s interpretation).
2. It is another matter that to determine the scope of the exemption, it will be necessary to review which assets are used in the business activity. The wealth tax legislation refers purely and simply to the personal income tax legislation to determine whether or not an asset is used in a business activity.

For these purposes, the Directorate General for Taxes noted that the ad hoc evaluation of whether the business assets are needed to carry on the activity is a matter that goes beyond its remit; and that in each case it will be necessary to weigh up the suitability and proportionality of the assets in question to the other assets of the entity, the type of activity it carries on and the volume of transactions and other economic and financial parameters of the company. These circumstances must be evaluated, where appropriate, in the audit and review procedures conducted by the tax authorities.