Tax Newsletter - May 2020 | DGT Resolutions and TEAC Decisions
Corporate Income Tax.- New resolutions on valid economic reasons in restructuring transactions have been published
Directorate General for Taxes. Resolutions V0222-20 of February 3, 2020; V0316-20 of February 11, 2020 and V0377-20 of February 19, 2020
In these resolutions, various restructuring transactions were analyzed, and the following (among others) were allowed as valid economic reasons:
a) In a merger by absorption, among others, simplifying preparation of the reports on controlled transactions and reducing the tax risk associated with pricing those transactions under the arm’s length principle, with elimination of intra-group receivables (V0222-20, of February 3, 2020).
b) In a non-monetary contribution of shares of a company under a voluntary insolvency proceeding, after the arrangement has been approved (V0316-20, February 11, 2020):
- Restructuring the business group, to centralize planning and decision-making, improve management and administrative efficiency, obtain economies of scale and use synergies that will reduce costs.
- Enabling optimum distribution of the funds generated by the group, by supporting the viability of each business.
- Facilitating the external perception of the group, to improve companies’ commercial capacitiesas well as their negotiating capacity with third parties, by strengthening the group's financial capacity and solvency.
- Simplifying future succession problems and enabling a family protocol to be put in place to ensure the future continuity of the group, by facilitating satisfaction of the necessary requirements in the wealth tax legislation and in the inheritance and gift tax legislation to claim the benefits for family businesses, while allowing election of the tax regime for groups of companies.
c) In a merger by absorption in which the absorbed company has a building and intended to commence building work on it, but has been refused a loan -or a mortgage not even with the provision of personal guarantees by the shareholders- (Resolution V0377-20, of February 19, 2020):
- Provide the whole business structure with more powerful assets, so that they can be presented to financial institutions to obtain the necessary financing for the building work to be performed.
- Provide the whole business with an optimum organizational structure. Following the merger the property leasing business will be run by a single company, which will rationalize costs.
Personal income tax.- If, after a pay-out of additional paid-in capital generating income from movable capital, income is distributed, the acquisition value will be reduced to the extent of that income
Directorate General for Taxes. Resolution V0447-20 of February 26, 2020
The issue submitted for resolution concerned a limited liability company that resolved to pay out its additional paid-in capital and wanted to know what treatment that pay-out would receive for personal income tax purposes in the hands of shareholders.
The DGT concluded as follows:
a) Where a limited liability company pays out additional paid-in capital it needs to be analyzed whether there is a positive difference between (i) the company’s shareholders’ equity in the last year that ended before the pay-out (the portion relating to the shares of each shareholder) and (ii) its acquisition value.
This positive difference has to be treated as income from movable capital.
b) The subsequent pay-out of income or reserves out of income, relating to any shares that had continued to be owned by the shareholder following the distribution of the additional paid-in capital, has to reduce the acquisition value, to the extent of the previously calculated amount of income from movable capital.
VAT – COVID-19.- Zero rate applies to supplies of medical equipment to all institutions, agencies and entities in the public sector
Directorate General for Taxes. Resolution V1456-20 of May 18, 2020
Article 8 of Royal Decree-Law 15/2020, of April 21, 2020, on urgent additional measures to support the economy and employment, allows zero rated VAT on internal supplies, imports and intra-Community acquisitions of the medical equipment listed in its annex, wherever the customer is an entity governed by public law, a private social welfare entity or a clinic or hospital and they are payable between April 23 and July 31, 2020.
Following the doubts that had arisen over the legal nature of the customers, in particular concerning the definition of “entities governed by public law”, the DGT concluded in this resolution that the term refers to all public authorities and institutions, agencies and entities in the public sector.
Wealth tax.- The shares of private equity firms acquired within three years after their registration with the CNMV are not held to comply with statutory or regulatory obligations
Directorate General for Taxes. Resolution V0322-20 of February 11, 2020
The “family business” wealth tax exemption is subject to various requirements. The reduction to the taxable amount for the inheritance or gift of a “family business” also depends largely on those requirements. Among others, where shares in companies are involved, the investee cannot have the management of securities or real estate assets as its primary activity. And, for these purposes, it is considered that a company manages securities or real estate assets and therefore is not entitled to the wealth tax relief, where for more than 90 days of the fiscal year, (i) securities account for over half of its assets, or (ii) more than half its assets are not used in economic activities.
To determine the portion of assets that consists of securities or assets not used in economic activities, the following, among others, are not computable: (i) securities held to fulfill statutory and regulatory obligations, or (ii) any that grant at least 5% of the voting rights and are held for the purpose of controlling or managing the investment through an organization of material and human resources.
In relation to private equity firms, Law 22/2014, of November 12, 2014, defines, in article 13, the obligatory investment ratio at these entities. In article 17, however, it states that private equity firms do not have to meet the mandatory investment ratio for the first three years after their registration in the relevant CNMV register.
In the case examined in this resolution, the requesting party gifted to his three children bare ownership of 100% of the shares in a company engaged in the management and administration of securities representing shares in other entities. That company intended to transfer its investment in a second entity and invest the proceeds, among others, in a private equity firm. The issue submitted for resolution concerned the treatment of this investment for the purpose of the relief, and specifically, whether the assets used at a private equity firm for satisfaction of the minimum investment ratio may be considered necessary for conducting its activities, and therefore, used in economic activities for the purpose of determining the scope of the exemption
The DGT concluded that, to determine whether the requirement to be eligible for the wealth tax exemption relating to whether the company has the management of securities or real estate assets as its primary activity is met:
a) The securities included in the mandatory investment ratio of the investee private equity firm are not computable as securities, because they are acquired to fulfill statutory obligations.
b) The other assets invested by a private equity firm in shares that are not part of the mandatory investment ratio are not computable as securities only to the extent that the requirement to invest at least 5% is met and provided the shares are held to control or manage the investment through the relevant organization of material and human resources.
In line with those comments, the DGT took the view that in the first three years of a private equity firm's existence, the shares owned by the firm will not be considered held to fulfill statutory and regulatory obligations (because in that period it is not a statutory obligation to meet the investment ratio); and therefore they have to be computable as securities for the purpose of determining whether the firm manages securities or real estate assets, unless they meet the mentioned requirement for a minimum 5% investment held to control and manage the investment with the appropriate organization of human and material resources.
Aside from the above, this resolution addresses various issues regarding the “family business” regime. The most relevant ones are the following:
a) As per the wealth tax exemption, income from the transfer of shares in entities in which at least 90 percent of their income derives from economic activities will be qualified as business income. Although this criterion must be taken cautiously pursuant to the recent Spanish Supreme Court judgement of October 19, 2017, it is a repeated criterion in the DGT.
In the same vein, the cash or collection right arising from the sale of the participation in a subsidiary, which carries out a business activity, will not be qualified and computed as an asset, which is not used in economic activities.
b) As regards the donation of shares in family business entities, the DGT clarifies that the requirement linked to the maintenance of the wealth tax exemption during ten years, will be deemed fulfilled when the right to the exemption is maintained during that period, regardless the percentage of ownership which is kept.
Both criteria, undoubtedly, make the transfer of companies that benefited from the family business tax regime more flexible without losing the tax benefits applied in the past.
Collection procedure.- The persons liable for tax may apply for deferred or split payment of debts in respect of withholdings with shifted liability
Central Economic-Administrative Tribunal Decision of February 27, 2020
The General Taxation Law contains a deferred and split-payment system for tax debts. This system is not available where the debts relate, among others, to personal income tax withholdings. The Central Economic-Administrative Tribunal (TEAC) concluded, however, in a recent decision that the persons liable for tax can indeed apply for deferred or split payment of tax debts that are in the voluntary or enforcement period, even if they relate to withholdings that were not deducted.
In the case examined by TEAC, the tax authorities had shifted the liability for certain tax debts in respect of personal income tax withholdings. The person held liable applied for deferred payment of the aggregate amount claimed in the decision shifting liability, but AEAT disallowed the application on the basis of the mentioned general prohibition of deferred or split payment of debts arising from the obligation to withhold personal income tax.
TEAC concluded in relation to these facts that the requested deferred payment should be granted.
As the Madrid Regional Economic-Administrative Tribunal had already found in the challenged decision to be ruled on by TEAC, the debt of the person held liable does not arise from the liable person’s own withholding obligation. The person required by the law to make the withholdings was the main debtor himself; whereas the liable person was only converted into the debtor as a result of the decision shifting liability.
In other words, as TEAC underlined in its decision, the person liable for tax is not a person with a withholding obligation who must pay a debt with the funds of another person (funds of the taxable person from whom the withholding is made), instead that person is a guarantor (third party) who was not originally required to pay the debt that was shifted to him, and who becomes subject to the obligation to pay it out of his own assets as a result of the shift of liability.
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