Tax Newsletter - November 2019 | Resolution Requests

Spain - 12 / 10 / 2019

Corporate income tax

DGT revisits the economic reasons considered to be valid in recent resolutions of issues related to the tax neutrality regime for restructuring transactions

Directorate General for Taxes. Resolution V1881-19 of July 18, 2019; resolution V2032-19 of August 6, 2019; resolution V2039-19 of August 7, 2019; resolution V2057-19 of August 7, 2019; and resolution V2061-19 of August 7, 2019

The Directorate General for Taxes (DGT) has recently replied to a raft of resolution requests concerning the tax neutrality regime for reorganization transactions. In many of these resolutions it was examined whether the reasons for performing them qualify as “valid economic reasons” for the purposes of that special regime.

Summarized below are a few of these reasons that the DGT considers economically valid:

In merger by absorption transactions, the following are accepted as valid economic reasons:

In a case where it is intended to absorb a company under an insolvency proceeding, it is considered valid that this is intended to ensure that the insolvent company continues trading and has access to the bank financing facilities that the absorbing company has available.
Simplifying the corporate structure, to rationalize the use of tax incentives under the Canary Island Tax and Economic Regime.

Against this, it said that, where a dormant company with unused tax loss carryforwards is absorbed, the existence of valid economic reasons may be questioned.

In a non-monetary contribution by two individuals of shares in an operating company to a newly created company, it is considered valid if it was done with the intention of storing the dividends and capital gains from the contributed companies at the holding company to enable new investments to be undertaken.
In a share exchange by two individuals that benefitted a nonresident (Dutch) company, the following reasons were considered valid:

To centralize planning and decision-making, and ensure uniform decisions.
To enhance management of the companies and reduce administrative and management costs.
To increase the selling and negotiating capacity with third parties, by forming a group of companies.
To enhance the group’s solvency and enable new sources of financing to be obtained.
To enhance the planning of conducted activities through business synergies, and achieve better coordination and use of resources, by having control over part of the management of affiliates and adopting policies for cooperation among affiliates.
To give rise to a structure that secures future survival.

Corporate income tax

Even though two companies belong to the same business group, the resources used by one of them for its activities cannot be used to determine that an activity is performed at the other, if the two activities are different

Directorate General for Taxes. Resolution V2042-19 of August 7, 2019

Company A is engaged in designing, producing and selling watches and has the necessary material and human resources to carry on this activity. The majority shareholder of A intends to form a second company B engaged in leasing real estate, which will not have the material and human resources needed for this activity. It is intended to transfer the shares of A and B later (under a share exchange) to a third company C.

It was asked whether, in view of the fact that A and B will be part of the same business group, B may be regarded as carrying on an economic activity, because another company in the same group (A) has the material and human resources. The DGT replied that the fact of two companies belonging to the same group does not mean that the material and human resources that company A has are used for B's activity, in view of the difference between the activities of one company and the other.

Corporate income tax

The tax neutrality regime may be claimed for an exchange in which only voting shares are issued

Directorate General for Taxes. Resolution V2025-19 of August 6, 2019

An individual directly owned shares in companies A and B. Company A had voting shares and non-voting shares. The issue submitted for resolution concerned a share exchange in which the individual was to contribute all the shares in company B to company A, in exchange for shares in company A’s capital stock. To achieve this, company A was going to perform a capital increase by issuing only new voting shares.

The DGT allows the neutrality regime to be claimed for this share exchange transaction, even if the beneficiary company only issues shares in the first class, provided this allows it to obtain the majority of the voting rights at the acquired company (B).

Corporate income tax

The benefit of accelerated depreciation may be transferred in a nonmonetary contribution of a line of business

Directorate General for Taxes. Resolution V1810-19, of July 11, 2019

Company A, engaged in leasing business and residential properties, is sole shareholder of company B, engaged in leasing residential properties and subject to the special regime for companies engaged in leasing. The request concerned the transfer of the residential property leasing business of company A to company B in a nonmonetary contribution of a line of business.

The DGT concluded that the benefit of accelerated depreciation, which company A has been electing, is transferable to company B in a contribution of a line of business, on condition that the transferee agrees to satisfy the requirements associated with that incentive and linked to the assets, rights, and liabilities it receives.

Personal income tax

Commencement of a professional activity means exclusion from the inbound expatriates regime

Directorate General for Taxes. Resolution V2663-19 of September 30, 2018

The DGT looked at the case of a worker subject to the inbound expatriates regime who terminated his employment and registered as an independent professional. It was asked whether this had an effect on his entitlement to claim that special regime.

One of the requirements for this regime is that the taxpayer must not obtain income that qualifies as having been obtained through a permanent establishment located in Spain. The DGT therefore concluded that the taxable person must be excluded from the special regime. That exclusion takes effect in the tax period when the requirement fails to be satisfied.

Personal income tax

For subsistence expenses not to be taxable it is a necessary requirement for the relocation to take place to a municipality other than that of the worker’s residence and that of the workplace

Directorate General for Taxes. Resolution V2553-19 of September 19, 2019

The requesting company had several sales and technical workers on its payroll who made frequent trips to customers’ premises. The workers were assigned to the company's workplace, but teleworked from their private homes (where ordinarily their business started and ended), and therefore they did not travel to their workplace on a daily basis.

In relation to these circumstances, two questions were asked:

Whether subsistence expenses (per diems) are exempt where employees travel to municipalities other than that of their principal residences for work reasons.
Whether those expenses are eligible for exemption where employees travel from their principal residences to their assigned workplaces, to participate in meetings or for other reasons.

The DGT recalled that, as a general rule, for subsistence expenses to be exempt (similarly to accommodation expenses) employees must travel to a municipality other than the municipality of their permanent residences and the municipality where their workplace is located. For this reason, the second type of per diems are not exempt under any circumstances and the first type are only exempt if the workers travel to a municipality other than that of their workplace.

The DGT also underlined that the payer would have to provide evidence of the date and place of the trip in addition to the reason for making it.

Personal income tax

An inbound expatriate does not have to be taxed on the surrender of contributions to a pension system made when he was nonresident

Directorate General for Taxes. Resolution V2358-19 of September 10, 2019

An individual relocated from Switzerland to Spain and applied for the special inbound expatriates regime. While he was living and working in Switzerland, as required under the legislation in that country, worker’s and employer’s contributions were made for a future pension. When he stopped being resident in Switzerland, the sum of money that had built up was transferred to a special bank account in the form of a single payment without waiting for retirement.

The DGT specified that the single payment arose from contributions made before the relocation to Spain, in other words, while the taxpayer was working and residing in Switzerland. Therefore, this income will not be treated as obtained in Spain and will not be taxed under the special regime for inbound expatriates.

Wealth tax

Family business relief claimable even if remuneration payments are not received from the directly owned affiliate

Directorate General for Taxes. Resolution V2067-19 of August 8, 2019

The request was submitted by two individuals who owned a holding company which in turn owned three operating companies. These individuals carried on management activities at the holding company and at one of the operating companies for which they received an amount of remuneration paid first by the holding company, but later charged to the affiliate under a service agreement between both companies. This remuneration accounted for more than 50% of the whole amount of remuneration of the requesting individuals.

Each individual was considering contributing their shares in the holding company to two new holding companies, (each of them) controlled by each of the individuals. The remuneration payments in respect of management activities would continue being received from the first holding company.

The DGT recalled that, as it had concluded in earlier replies, the fact that the new holding companies (in other words, the companies owned directly by the individuals after the planned nonmonetary contribution) are not the ones remunerating the management activities is not an impediment to claiming the family business relief from wealth tax, as long as the appropriate provisions are included in the deed of formation or in the bylaws.

Wealth tax

An investment in a private equity fund may restrict the family business exemption

Directorate General for Taxes. Resolution V2582-19 of September 20, 2019

It was asked whether the family business exemption could be claimed for shares in a limited liability company that was considering investing in 5% or a higher percentage of a private equity fund that invested in other private equity entities and was managed by a management company.

One of the requirements for that exemption is that securities must not account for more than half of the entity’s assets. For these purposes, securities do not include, among others, any meeting the following requirements:

Those which carry at least 5% of voting rights and are held for the purpose of controlling and managing the investment, provided that there exists for this purpose the appropriate organization of human and material resources.
The primary activity of the target entity cannot be the management of movable or real estate assets.

Accordingly, the DGT explained that:

The shares in a private equity fund in principle qualify as securities.
Since the investment in the limited liability company was going to be higher than 5%, this would mean obtaining voting rights at the meeting of investors in the private equity fund equal to more than 5%. Therefore, the first requirement enabling this investment not to be included in the calculation of securities had been met.
The private equity fund’s purpose, however, was to invest in other private equity entities, and therefore its assets consisted primarily of securities. Additionally, it was to be managed by a “manager”, so, by nature, it would not have the appropriate organization of material and human resources needed to exclude the securities from the calculation of assets for the purposes of assessing whether a company’s primary purpose was the management of movable or real estate assets.
It had to be concluded therefore that the private equity fund’s primary purpose was the management of real estate assets and one of the requirements for excluding the investment in the private equity fund from the limited liability company's assets had not been satisfied.