Tax Newsletter - November 2020 | Decisions

Corporate income tax.- The offset of tax losses in a tax group has a double limit where the losses were generated before the entity joined the group

Central Economic-Administrative Tribunal (TEAC). Decision of September 24, 2020

In this decision, TEAC examined how tax losses must be used in tax groups and concluded that the tax losses generated by its entities on an individual basis before they joined the group are subject to a double limit:

1. The general limit under article 66 of the law, namely a limit equal to 25, 50 or 70 percent of the tax base before using the capitalization reserve, by reference to net revenues on a group basis.
2. The additional limit under article 67.e) of the law, namely a limit equal to 25, 50 or 70 percent of the individual tax base, by reference to their net revenues on an individual basis.

Corporate Income Tax.- It is contrary to EU law to establish a different double taxation tax credit mechanism depending on the residence of the paying entity

Central Economic-Administrative Tribunal. Decision of September 24, 2020

The Revised Corporate Income Tax Law allowed a number of different types of mechanisms for double taxation relief on dividends received from entities more than 5% owned, which depended on the residence of the paying entity. If the dividends were paid by a Spanish resident entity, up to 100% of the gross tax payable on the dividends could be deducted. Whereas if the dividends were paid by a non-Spanish resident entity, only the tax actually paid abroad could be deducted.

In this decision, TEAC adopted the Supreme Court's principle in its judgments of July 2, 2020 (appeal 3503/2017) and of September 17, 2020 (appeal 1103/2019), in which it argued that the difference in treatment based on the residence of the entity paying the dividends is contrary to the free movement of  capital. In our October 2020 Newsletter we discussed the second of these judgments (see here).

The lawmakers have since acknowledged this discrimination and the Corporate Income Tax Law now in force contains a relief mechanism that applies in the same way to Spanish source dividends and dividends from other countries.

Inheritance and gift tax.- Household items cannot include any unrelated assets 

Central Economic-Administrative Tribunal. Decision of September 30, 2020

In this decision, TEAC adopted the principle determined by the Supreme Court and concluded that household items can only include a certain type of assets rather than a percentage of all the assets in the inheritance.

In this specific case, TEAC concluded that when calculating household items under the rebuttable presumption in article 15 of the Inheritance Law (3% of the estate) assets such as shares or money, among others, should not be included.

Administrative procedure.- In a decision on an appeal for reconsideration tax authorities cannot correct errors in the reasons given in the assessment decision

Valencia Regional Economic-Administrative Tribunal. Decision of October 31, 2019

The auditors stated that certain traveling expenses were non-exempt per diems. The reasons provided in the assessment were article 17.1.d) of the Personal Income Tax Law, which specifies that “per diems and allowances for traveling expenses”, among others, are salary income.

In its appeal for reconsideration, the taxpayer pleaded that the reason why those per diems were not reported was because the taxpayer had considered they were exempt under article 7.p) of the Personal Income Tax Law (“salary income in respect of work actually performed abroad”).

The decision on the appeal for reconsideration confirmed the assessment, although the reviewing body’s arguments were built around article 7.p) of the Personal Income Tax Law (not that relating to per diems).

The Valencia TEAR concluded that the decision on an appeal for consideration cannot correct defects in the reasons given for the challenged assessment, and accordingly set aside the challenged decision and the acts that gave rise to it.

Shifting of liability.- In cases involving gifts made in fraud of creditors, the giver cannot be held liable if it is not proven that they acted with the intention of preventing steps by the tax authorities

Central Economic-Administrative Tribunal. Decision of October 19, 2020

A taxpayer was held secondarily liable for her mother’s debts. The tax authorities considered that the mother had gifted assets to her daughter to prevent steps being taken by the tax authorities, and that the daughter had taken part in the concealment. At the time, the daughter was under age.

TEAC recalled that if it is found that the giver has not kept sufficient assets to pay off their existing debts before the gift, the presumption of law under article 643.2 of the Civil Code (gift in fraud of creditors) applies. Namely, the tax authorities can consider it proven that the debtor concealed property or rights to prevent them being encumbered.

That presumption does not however allow the tax authorities to consider it proven that the recipient’s participation in the concealment displayed bad faith, because the presumption of the fraudulent nature of the gift in the circumstances mentioned in that article only refer to the giver’s participation in the fraud, not the recipient’s bad faith.

In short, to hold the recipient liable under article 42.2.a) LGT, it must be evidenced that they acted intentionally to prevent steps by the tax authorities, in other words, with knowledge or awareness of the prejudice caused, and it is not valid to read this in conjunction with article 643 of the Civil Code.