Tax Newsletter - November 2019 | Decisions

Corporate income tax

Cost of VAT on gifts in kind that is not assumed by the recipient is added to the base for tax credit in respect of gifts

Central Economic-Administrative Tribunal. Decision of October 8, 2019

Under article 18.1.b) of Law 49/2002, of December 23, 2002, on not-for-profit entities and tax incentives for patronage, in relation to gifts of goods or rights the base for the tax credit is the carrying amount of the given goods or rights when they were transferred.

In the case examined in this decision, the entity had made a gift in kind and had assumed the cost of the VAT charged on that gift. For that reason, it considered that the tax credit in respect of gifts claimable for corporate income tax purposes had to be calculated by reference to the whole cost of the gift, including the VAT charged but not collected from the recipient entity.

TEAC accepted the taxpayer’s argument (on the basis of resolution number 1 of the Spanish Accounting and Audit Institute Gazette, issue 115, September 2018) and concluded that the VAT charged on the gift in kind creates a debt for the recipient which as a result of being forgiven generates an expense for accounting purposes for the giver which therefore is part of the base for calculating the tax credit in respect of gifts.

 

Corporate income tax

Bringing financial assets together at a single entity that does not have financial risks qualifies as a valid economic reason

Central Economic-Administrative Tribunal. Decision of October 8, 2019

The issue focused on determining whether for the purposes of claiming the tax neutrality regime, placing financial assets at a single entity that does not have financial risks for it to serve as a vehicle for future investments qualifies as a valid economic reason, or whether, by contrast, the regime cannot be allowed as a result of endangering the solvency of the entity from which the assets left to the detriment of third parties.

At first instance, Madrid TEAR (Economic-Administrative Tribunal) concluded that the special tax neutrality regime was not allowed to be claimed, because the transaction gives rise to a dissipation of assets unrelated to tax which cannot be considered a “valid economic reason”.

TEAC concluded, however, that the tax neutrality regime can only be denied where the main purpose of the transaction is tax evasion or fraud. In other words, any other economic reason (such as, in the specific case raised, safeguarding capital from potential business risks) must be considered included in the vague legal concept of “valid economic reason” in the Corporate Income Tax Law.

 

Corporate income tax

Refund of a tax prepayment is a refund arising from tax law

Central Economic-Administrative Tribunal. Decision of September 10, 2019

The tax authorities issued an assessment for a corporate income tax prepayment. The assessment became final after the annual return for the tax was filed, and for that reason the assessed prepayment could not be deducted. Therefore, to recover the amount of the prepayment assessed earlier, the taxpayer applied for correction of its self-assessment of the tax.

TEAC concluded that the right to apply for a refund arises when the taxpayer paid the amount of the prepayment assessed by the tax authorities, because that is when the excess over the tax liability contained in the self-assessment occurs.

However, because this case involves a refund arising from the mechanism for the tax, late-payment interest must start to be calculated after six months have run from the filed application for correction.

 

Personal income tax

For termination by mutual agreement to benefit from multi-year income treatment there must be a real and actual break in the worker’s relationship

Central Economic-Administrative Tribunal. Decision of May 14, 2019

A worker received a severance payment in respect of termination by mutual agreement of an employment contract. Immediately afterwards the worker was hired on a self-employed basis to carry out similar tasks to those he was performing before his dismissal. The issue focused on determining whether the reduction for clearly multi-year income applied. The tax authorities had disallowed that treatment because they considered that no real break had occurred in the relationship between company and worker.

Madrid TEAR upheld the taxpayer's claim because it considered that to be able to reject the reduction the tax authorities should have used a simulation proceeding. Finding against this, TEAC concluded that:

1. It is not necessary for simulation to be found to exist. It simply needs to be determined and evidenced that there has been no real and actual break in the relationship.
2. Under article 31 of the Spanish Constitution the reduction has to be rejected in a scenario of the type submitted, even though the personal income tax legislation only requires an actual break in the workers’ relationship as a condition for the exemption in respect of severance payments not for the reduction in respect of multi-year income.

TEAC further underlined that the reduction seeks to soften the impact that an item of multi-year income may have on the progressive nature of the tax. The worker, however, had been taxed at the highest marginal rate, so in this case there are no arguments supporting the tax benefit.

 

Nonresident income tax

If interest is paid to a holding company resident in a member state, but the beneficial owner is not resident in the EU, it is subject to withholding tax

Central Economic-Administrative Tribunal. Decision of October 8, 2019

It was examined whether there was an obligation to withhold nonresident income tax on the interest paid by a Spanish entity to a Dutch holding company, whose beneficial owner was resident in Andorra.

The tax authorities argued that the Dutch company did not have power of disposal over the interest paid by the Spanish company because, as a result of its status as intermediary or mandate holder of the Andorran company, it was required to transfer the interest to that Andorran company. The taxpayer argued against this that in the Spanish legislation governing the interest paid to companies resident in the EU (article 14.1 c) in the Revised Nonresident Income Tax Law there is no beneficial owner clause.

According to the interpretation determined by the CJEU in its judgment of February 26, 2019 (C-115/16, C-118/16, C-119/16 and C- 299/16, N Luxembourg) in relation to the Interest and Royalties Directive, TEAC concluded that in a scenario of the type submitted the beneficial owner clause may be applied even if this clause has not been implemented in Spanish law and without needing to apply a general anti-abuse clause (conflict in application of the law or simulation).

TEAC added that:

1. The fact of interest being transferred after being received (and in a very short space of time from when it is received) is an indicator of abuse.
2. Although an attempt by the taxpayer to claim the most advantageous tax regime cannot in itself give rise to a general presumption of fraud or abuse, a purely artificial transaction in economic terms should not benefit from a right or advantage under EU Law.
3. It is the tax authority seeking to deny the exemption that is required to prove the existence of an abusive practice. In this type of case, however, it is not necessary to identify the beneficial owners of the interest, but to prove that the alleged beneficial owner is simply a holding company through which an abuse of law has taken place.

 

VAT

Input VAT incurred by a holding company on disproportionate compensation for directors is not deductible

Central Economic-Administrative Tribunal. Decision of September 18, 2019

The single activity of a holding company is management of its one and only subsidiary. It invoices €70,000 a year in respect of that activity. In performing the activity it assumes costs in respect of its directors’ compensation amounting to over €2 million. That compensation is recorded on an invoice with VAT.

TEAC disallowed deduction of this input VAT by the holding company. The tribunal argued that:

1. It is irrelevant whether receipt of the services provided by the directors is mandatory.
2. There must be a connection between the services provided by the directors and those provided by the holding company to its subsidiaries for the holding company to be entitled to deduct its input VAT. In this case:

3. In short, the holding company cannot be characterized as a trader or professional for the purposes of the tax by reason of the services provided to the subsidiary.

 

Collection procedure

Simple negligence is not a sufficient reason for holding directors jointly and severally liable

Central Economic-Administrative Tribunal. Decisions of September 24, 2019

TEAC examined in two decisions the following scenarios for holding directors jointly and severally liable:

1. A scenario where inexact corporate income tax and VAT returns had been filed, but the tax authorities did not evidence that the director was at fault.
2. A second scenario where forged invoices had been issued containing an amount much higher than the value of the work actually performed or reflecting the provision of non-existing services; the director, according to the proof provided by the tax authorities, had participated in issuing the invoices.

TEAC concluded that to hold a director jointly and severally liable, in addition to the tax infringement and director status (elements shared by both types of liability) an intentional element involving major fault is required, comparable to criminal willful misconduct. Specifically, the attribution of joint and several liability requires proof to be provided of willful intent on the part of the director not simply negligence or fault in supervising (which by contrast would be sufficient to attribute secondary liability).

For this reason, in the first scenario, it concluded that joint and several liability could not be attributed to the director, because proof had not been provided of an intentional element comparable to criminal willful misconduct. In the second case, however, it confirmed that the director was jointly and severally liable, by arguing that proof had been provided of the intentional element of willful misconduct when forged invoices were issued.

 

Collection procedure

Once the liquidation phase has begun administrative enforcement action cannot be taken to collect pre-order claims

Central Economic-Administrative Tribunal. Decision of September 24, 2019

TEAC had already held as an official interpretation that the tax authorities were authorized to render enforced collection interlocutory orders against insolvent debtors, if the claims behind those orders were pre-order claims.

In view of the supreme court judgment of March 20, 2019 (appeal 2020/2017), discussed in our Tax Newsletter for April 2019, TEAC has now changed its interpretation by holding that, after the liquidation phase of the insolvency proceeding has been opened, the tax authorities cannot render enforced collection interlocutory orders against insolvent debtors (not even to require payment of pre-order claims).

 

Penalty procedure

The late filing of Form 720 is not subject to a penalty in itself

Canary Islands TEAR (Decision of February 22, 2019) and Galicia TEAR (Decision of June 27, 2019)

In these decisions two cases were examined in which a penalty had been imposed on the taxpayer for the late filing of the information return on assets and rights abroad (Form 720).

In both decisions, the regional tribunals stressed the particular importance of providing reasons for fault in cases involving a penalty on the taxpayer. The tax authorities must therefore provide specific reasons for the existence of fault in the particular case concerned.

Both Galicia TEAR and Canary Islands TEAR concluded as follows:

1. A delay in filing a return is not subject to a penalty in itself. Reasons must therefore be provided for finding there was fault on the part of the taxpayer who was late in performing its obligation, at least in the form of simple negligence.
2. It is insufficient for fault to be based only on the fact that the taxpayer should have known about its obligation to file Form 720, in view of the advertising and information campaign organized by the tax authorities when that form was approved. Especially since this was a new form, approved in the year to which the late return related.

Finding against this, in a judgment rendered on July 11, 2019, Extremadura High Court confirmed the penalty for the late-filing of Form 720, based only on the fact that the taxable person should have known about its obligation, in view of the size of its assets abroad; the court added also that it is likely that, for the same reason, the taxpayer had been advised by experts. 

 

Review procedure

The circumstances that followed the challenged act, appeared in the file, and are essential for examining it must be taken into account

Central Economic-Administrative Tribunal. Decision of September 10, 2019

A company applied for correction of a corporate income tax self-assessment on the basis of specific circumstances that originated from an audit. That audit had not ended when the tax authorities and Madrid TEAR dismissed the company’s arguments.

TEAC held that the decisions adopted by the tax authorities and Madrid TEAR were correct, in that the application for correction of the self-assessment could not be upheld before the end of the procedure that gave rise to the reason underlying that request.

It also concluded however that it would not be lawful to lay down that the taxpayer, once the audit has ended (and because the circumstance underlying the application for correction arose in that audit), must initiate another procedure for correction of its self-assessment, submitting the same information as in the initial claim.

For all of these reasons, under the principles of expediting proceedings and as a result of the broad powers that the General Taxation Law confers on it, TEAC concluded that, to render a decision on each case, in addition to the prior and existing circumstances for the challenged act (in the examined case, the initial correction of a self-assessment), other circumstances must be considered which, despite coming after that act, appear in the proceeding and are essential for a decision on it.