Tax Newsletter - November 2020 | Judgments

Personal income tax.- Surrendered pension plan can be lowered by contributions that did not reduce net taxable income

Supreme Court. Judgment of November 5, 2020

An individual had been making annual contributions to a pension plan, but had never used those contributions to reduce net taxable income. On receiving the benefit under the plan, they lowered the income to be reported on their tax return by the contributions made earlier.

The tax authorities considered that the law does not allow the income obtained from surrendering a pension plan to be lowered by the amounts of earlier contributions, even if they have not reduced the net taxable income to be reported each year.

Taking the opposite view, the Supreme Court concluded that article 51.6 of the law only bars lowering the amount received in respect of surrendering the plan by “amounts exceeding” the contributions by the participant or the contributions by the sponsor. The fact that nothing is mentioned in the article about cases in which, despite being able to do so, the participant did not reduce their net taxable income when they made contributions to the plan, does not authorize the conclusion that the reduction cannot be made later when the surrendered amount is received.

 

Personal income tax.- Income obtained from leasing a residential property can be reduced, even if not reported on a personal income tax return

Supreme Court. Judgment of October 15, 2020

The tax authorities adjusted the tax liability of a personal income taxpayer, by attributing unreported income from immovable capital to them, from which they did not subtract the reduction for residential leases, due to considering that under article 23.2 of the Personal Income Tax Law, “this reduction shall only apply with respect to income reported by the taxpayer”.

Basing its view on the distinction between the definitions of return and self-assessment, the Supreme Court concluded that the mentioned limitation only applies to returns, not in an audit of self-assessments (which was the case here). It noted moreover that under the complete adjustment principle, procedures for the application of taxes may end with a decision finding in favor of the taxpayer, without precluding any penalties imposed for not reporting the income reviewed in the audit.

 

Personal income tax.- Relief for reinvestment in a principal residence may be claimed where the investment is made partly in cash and partly by taking over a mortgage

Supreme Court. Judgment of October 1, 2020

A taxpayer reported a capital gain from the sale of a residential property, and claimed the relief for reinvestment in a principal residence. The reinvestment was made by purchasing a second principal residence, which was paid for partly in cash and the taxpayer covered the remaining amount by taking over the transferor's mortgage.

The tax authorities argued that only the amount paid in cash could be treated as reinvestment, together with the loan repayments made in the two years following the transfer of the first residential property, because the Personal Income Tax Regulations require the sum obtained from the transfer to be reinvested within two years.

However, the Supreme Court found in favor of the taxpayer and held that, to be able to claim the tax relief on reinvestment, it is not necessary only to reinvest the cash obtained from the sale of the previous property, since it is sufficient to use for the same purpose money borrowed from a third party, either directly or as a result of taking over a loan entered into earlier by the transferor of the property.

 

Personal income tax.- Departure due to pre-retirement agreed within a collective layoff procedure qualifies for relief

Supreme Court. Judgment of September 21, 2020

In a collective layoff procedure (ERE) taxpayer and employer signed a pre-retirement agreement.

The Supreme Court concluded that in a collective layoff procedure it cannot be considered that the termination of employment contracts on the ground of pre-retirement is voluntary for the worker or is the result of a mutual agreement between the parties. The collective procedure is based on a unilateral decision by the employer, regardless of whether the departures take different forms which the workers can elect.

As a result, the received severance payments may be exempt (in the same way as the payments for any dismissal on objective grounds) up to the limit set in article 7.e) of the Personal Income Tax Law.

Any excess over and above that limit may qualify for treatment as multi-year income subject to the legal requirements.

 

Personal income tax.- The valuation method for income in kind in respect of vehicles supplied for use by employees cannot change from one audit to another without giving reasons

National Appellate Court. Judgment of September 24, 2020

It is a settled administrative and judicial principle that vehicles supplied for use by employees must be valued according to their availability for private use. In the case giving rise to this judgment, the auditors determined an availability percentage higher than the rate the tax authorities had applied in an earlier audit.

The National Appellate Court found that the tax authorities cannot change the method used to calculate the percentage of private use of vehicles upheld in earlier audits, without giving reasons for changing the method, because it would mean a breach of the doctrine of own acts.

 

Transfer and Stamp tax.- The transfer of a mortgage is taxed on the actual mortgage collateral, meaning the outstanding principal

Supreme Court. Judgment of October 29, 2020

An entity acquired loans secured by a mortgage in a public deed on which it was liable for stamp tax. The taxable person calculated the taxable amount for the ad valorem stamp tax payment by reference to the received price.

In relation to this transaction, the tax authorities issued an assessment in which they took the view that the taxable amount for the ad valorem stamp tax payment should not be the amount paid for the transfer of the loan, or the amount of the remaining mortgage liability in respect of the outstanding loan (plus the interest and costs associated with that amount), but rather the total amount of the original mortgage liability that had been secured with the mortgage.

In this judgment, the Supreme Court concluded that the taxable amount for stamp tax purposes in transfers of mortgages amounts to the outstanding principal at the time of the transfer, including costs, indemnity payments or other outstanding items (what the doctrine has been referring to as “current mortgage liability”).

 

Local authority fees.- Supreme Court overturns local authority rules on fee for restricted parking permits approved by Madrid City Council

Supreme Court. Judgment of October 21, 2020

In this judgment the Supreme Court dismissed the cassation appeal lodged by Madrid City Council and confirmed the Madrid High Court judgment of November 3, 2017, overturning article 11.2 of the local authority rules on the fee for restricted parking permits, in the wording in force after the amendment was approved to come into effect on 2017.

The court found there was no justifiable reason why a fixed interest rate on the value of the covered area should be taken into account to calculate the fee amount; and this defect could not be corrected by including that parameter in the technical and economic report on the rules.

 

Cadastral values.- If factual errors in the determination of the cadastral value of a property are proven, the Cadaster must initiate a procedure for correction of errors not for correction of discrepancies

Madrid High Court. Judgment of July 20, 2020

The legislation governing the cadaster states that, where the cadaster initiates a procedure for correcting discrepancies as a result of a lack of consistency between a property description in the cadaster and the property’s actual characteristics, any new cadastral value that is notified will be effective from the date following that of the decision to correct it. However, if these discrepancies are due to an error relating to fact or substance, or an arithmetical error, made by the Cadaster when determining the cadastral value, the new value must be backdated to the date that error took place.

In the case examined in this judgment, the appellant discovered that various factual, substantive or calculation errors had been made in the process for determining the cadastral value of the residential property, including an incorrect date for the completion of its construction. Following a request for correction of these errors and the resulting reduction of the cadastral value of the property, the Cadaster initiated a procedure for correction of discrepancies instead of a procedure for correction of errors.

Madrid High Court found in favor of the appellant. It affirmed that, when factual errors were proven in relation to the process for determining the cadastral value of the property (errors which were found to exist after examining the documents that the tax authorities had when they determined the value), the Cadaster should have initiated a procedure for correction of errors, effective retroactively, not one for correction of discrepancies.

 

Tax on increase in urban land value.- A property's book value cannot be rejected as a means of evidencing, at least on a prima facie basis, the absence of an increase in value of the land

Catalan High Court. Judgment of July 29, 2020

The court examined a case in which a company had transferred a property acquired in a partial spin-off. After paying the tax on the increase in urban land value, the company applied for a refund of incorrectly paid tax, on the basis of the absence of an increase in value of the land between the acquisition and transfer dates. To evidence this fact, the company provided proof of the property’s carrying amount on the balance sheet when that partial spin-off took place.

The Catalan High Court noted that a balance sheet cannot automatically be dismissed as a valid means of proof of acquisition cost because it  gives an indication, if only on a prima facie basis, of that value. Therefore, if the tax authorities believe it had a different acquisition cost, they should prove this.

 

Principles of effectiveness and equivalence.- The time limit set for applying for a refund of taxes in breach of EU law cannot be shorter than that determined for similar refunds based on an infringement of domestic law

Court of Justice of the European Union. Judgment of October 14, 2020. Case C-677/19

A Romanian company paid a tax on the first registration in Romania of a vehicle from the Netherlands, in respect of an “environmental stamp duty for motor vehicles”. This and other Romanian pollution taxes were later held to be incompatible with EU law by the Court of Justice of the European Union (CJEU).

Following this ruling, a domestic law was published in Romania allowing taxpayers to apply for a refund of any sums paid in respect of any of the taxes held to be incompatible with EU law. However, that law specified a one-year time limit for filing those applications (from its entry into force), as opposed to the five-year period allowed for recovering sums levied in breach of domestic law.

In relation to the principle of effectiveness, the CJEU held that the one-year time limit granted for filing applications or actions based on an infringement of EU law appears reasonable, in itself, provided, however, that the starting point of that time limit is not fixed in such a way as to make it impossible in practice or excessively difficult for the person concerned to exercise rights conferred by EU law.

Regarding the principle of equivalence, the Romanian government alleged that the new law had a disadvantageous effect for some taxpayers whereas it benefited others.

Basically:

1. Before the law, any refund application could be filed within five years. The law had the effect of limiting the time limit to one year for taxes in breach of EU Law. But that deadline was calculated from the entry into force of the law.
2. It therefore benefited taxpayers whose rights (previously subject to a five year time limit) were about to expire when the law came into force, because they were given another year in which to apply for a refund.

However, the CJEU observed that, while the law had the advantageous effect of extending the refund application period for some taxpayers, it also had the disadvantageous effect of shortening the generally applicable period for all other taxpayers, which was the time limit for refund applications for taxes levied in breach of domestic law.

The described law therefore may be seen to infringe the principle of equivalence, because this principle does not allow a disadvantage suffered by one group of taxable persons to be offset by an advantage granted to another group in a similar situation. The CJEU concluded therefore that the principle of equivalence, read in conjunction with the principles of legal cooperation, precludes the described legislation.

 

Tax options.- It should be allowed to correct an elected option if the circumstances in which the election was made have changed, unless the taxpayer’s conduct warrant a penalty

Supreme Court. Judgments of October 15, 2020, of October 21, 2020, and of  October 29, 2020

The cases examined in these three judgments involved three entities that had apllied the regime for “patrimonial companies”, whereas the auditors considered that they were subject to the standard corporate income tax regime. All three companies had carried out installment transactions:

1. In the regime for patrimonial companies, the tax base is determined by reference to the personal income tax legislation. Under this legislation, installment transactions are reported on an accrual basis, unless the option of reporting income on collection is elected.
2. Under the standard corporate income tax regime the opposite is the case: in other words, the standard rule is to report income in installments (as the payments are made), unless the accrual basis is elected.

When the auditors took the view that the companies were subject to the standard corporate income tax regime, the entities made known (in the audit) their election of the cash basis option. The auditors argued, however, that because in their self-assessments the taxpayers had implicitly elected the accrual basis option (by not making known their election), that election could not be altered.

The Supreme Court concluded that:

1. As a general rule, elections of options cannot be altered outside the time limit specified in article 119.3 of the General Taxation Law (LGT). They can be altered, however, if the circumstances in which they were made have changed substantially.
2. In the examined cases, the companies changed from being taxed under the special regime for patrimonial companies to being taxed under the standard corporate income tax regime, according to the principle applied by the auditors.
3. Therefore, because the circumstances in which they had to elect to be taxed in one way or another had changed, the auditors should have given the interested parties the chance to elect the regime they considered to be more advantageous.

As an exception, this option cannot be given if the adjustment by the tax authorities is accompanied by penalties.

 

Management procedures.- The tax authorities cannot audit the same tax obligation twice, even if in the first audit they did not expressly give their view on some of the audited elements

National Appellate Court. Judgment of July 30, 2020; and Supreme Court. Judgment of October 16, 2020

A married couple reported on their joint personal income tax return for 2009 a capital gain on the transfer of a property. Following a limited review procedure on personal income tax, a provisional assessment was issued in which a few tax items were adjusted, although no express view was given on the amount of the reported capital gain.

In a later limited review procedure on personal income tax for the same fiscal year, the transfer value of that property was audited.

The Supreme Court concluded as follows in a judgment rendered on October 16, 2020:

1. If the tax authorities already had all the necessary documents to alter the reported capital gain since the first limited review procedure, they were not allowed to audit the transaction again in a second procedure. The commencement of a second procedure must be for reasons related to the existence of “new information” with respect to the documents accessible to the tax authorities in the first procedure, which does not occur in this case.
2. The preclusive effect of the limited review procedure does not extend only to the audited items specified in the express decision bringing the limited review procedure to an end, since this would allow the tax authorities to audit the same element of the tax obligation more than once if they had not specifically expressed an opinion on that specific element.

The National Appellate Court took a similar view in a judgment delivered on July 30, 2020, in which it also noted that the tax authorities are required to give reasons for making a new adjustment in relation to the reviewed item. The assessment is not valid if they fail to do so. It underlined moreover that the courts and tribunals have the power to review any reasons provided by the tax authorities.

TEAC also delivered a decision to the same effect on September 24, 2020 (see here). It concluded that it is not necessary to start a new process on the items reviewed in an earlier audit, with the intention of finding new elements to adjust. In short, facts or circumstances that the tax authorities discover for the first time in the course of the second audit, due to having made a greater effort or a more detailed examination than in the first process, do not justify a new review.

 

Audit procedure.- Request for valuation reports is not a sufficient ground for suspending the statute of limitations for an audit

Supreme Court. Judgment of October 16, 2020

In an audit on inheritance and gift tax, the tax authorities included as a justified tolling event the request for a valuation report from the Real Estate Valuation Service attached to the Directorate-General for Taxes in the respective autonomous region.

The Supreme Court concluded as follows:

1. A valuation report is not deemed to justify a temporary suspension of audit work if the only purpose of the valuation process is to value income, products, property and other elements determining the tax obligation.
2. Nor is a temporary suspension of the procedure by the tax authorities justified to ask for and obtain valuation reports if they are requested from an office that is part of the same administrative body.
3. Lastly, even where there is a justified suspension, the suspension period does not necessarily have to be subtracted to extend the statute of limitations for the audit work if, in the waiting period until the information is received, the auditors could have carried out other activities.

 

Audit procedure.- There is a single statute of limitations for audits, even if its scope is extended after work commenced

Supreme Court. Judgment of October 14, 2020

At issue was how to calculate the statute of limitations for an audit if the work is increased and the review is extended to include new items and periods not originally scheduled.

The Supreme Court concluded that, under the principle of a single procedure, the statute of limitations (for all audited items and periods) starts to run when the taxpayer is notified of the start of the procedure and ends when notice is given of the tax assessment.

The conclusion to be drawn is that, in relation to a breach of the statute of limitations, it will be considered that the audit work has not suspended the tax authorities’ right to assess the items and periods in its scope, which includes any items and periods added after it started.

 

Audit procedure.- If a final tax assessment is in breach of the law, the tax authorities must withdraw it 

National Appellate Court. Judgment of July 30, 2020

A nonresident income tax assessment became final because the taxpayer did not appeal. Later, the taxpayer asked for it to be withdrawn based on a CJEU judgment that concluded that the applicable legislation was in breach of EU law. The tax authorities nevertheless did not allow that request.

The National Appellate Court concluded that the request for withdrawal must be granted because it is based on a CJEU judgment determining that the assessment is in breach of the law. In these cases, a refusal to allow that withdrawal must be regarded as arbitrary and running counter to the constitutional principles “on which good government must be grounded”.

 

Penalty procedure.- Simulation is incompatible with the existence of a reasonable interpretation of the law

Supreme Court. Judgments of September 21, 2020 and October 15, 2020

At issue was whether, after the auditors have found the existence of simulation and initiated a penalty proceeding, the imposition of a penalty may be avoided by arguing that the taxpayer’s actions were allowed under a reasonable interpretation of the law.

Briefly, the Supreme Court concluded as follows:

1. Simulation presupposes the existence of concealment and therefore intent.
2. So, if the existence of simulation is held to be proven, it does not make sense for the penalty not to be imposed because the person made a reasonable interpretation of the law.

 

Review and collection procedures.- A decision partially upholding the claim stops interest on stayed debt obligations accruing

Supreme Court. Judgment of October 7, 2020

In the case that gave rise to this judgment, a taxpayer’s claim had been partially upheld by partially confirming the originally assessed tax debt on substantive grounds. At issue was whether in the assessment issued to enforce the decision, interest must be charged in respect of the length of time the assessment was suspended.

The Supreme Court concluded that, when an assessment is partially voided, the debt that was originally suspended disappears. So interest on suspended debt obligations cannot be charged, although late-payment interest may be payable under article 26.5 LGT.

 

Collection procedure.- A breach of the duty to report to the collection authority the filing of an application for judicial review does not trigger commencement of the enforcement period

Supreme Court. Judgment of October 15, 2020

Article 233.9 LGT provides that where an application for judicial review is filed, a stay ordered in the administrative jurisdiction must be kept in force if, within the filing period, the interested party reports to the tax authorities that it has filed that application and that it has requested a stay of the challenged decision.

In the case analyzed in this judgment, the taxpayer had not reported this information within the required period.

The Supreme Court concluded that:

1. The aim of the obligation to report the filing of the appeal is for the applicant to have certainty that the debt will not be enforced.
2. This is not, however, a solemn, material or substantive requirement to stop enforcement of the debt, so failure to do so or late performance cannot entitle the tax authorities to seek payment of the debt, and if applicable, initiate enforced collection.

Therefore, the new voluntary payment period does not start until notification of the court decision bringing the ancillary preventive stay proceeding to an end; so payment of the debt within that period prevents initiation of enforced collection proceedings and the imposition of surcharges.

 

Enforced collection procedure.- The tax authorities cannot issue an interlocutory order initiating enforced collection proceedings before deciding on a request for deferred or split payment filed by the taxpayer

Supreme Court. Judgment of October 15, 2020

The Supreme Court determined that the principle of good government prevents the tax authorities from initiating enforced collection proceedings in relation to a tax debt without analyzing and replying with reasons to a request for deferred (or split) payments filed by the taxpayer in relation to the same debt, even if the request was made after the debt had entered the enforcement period.

 

Financial liability of the government. - Action for financial liability of the government may be brought following a final judgment dismissing an application for review of null and void decisions

Supreme Court. Judgments of September 21, 2020, October 19, 2020 and October 22, 2020

To be able to file a claim for financial liability against the government following the application of a law held unconstitutional, the requirements are that the claimant must have obtained, at any instance, a final judgment dismissing an appeal against the actions of the government that caused the damage in which the breach of a constitutional principle that was later upheld had been pleaded.

In its interpretation of this requirement the Supreme Court concluded that it includes any forms of challenge that (i) bring to light the interested party's disagreement with the actions of the authorities due to being unconstitutional and (ii) give rise to judicial control which results in a final judgment examining the constitutionality of the rule that is later the subject of a ruling by the Constitutional Court.

Among these forms of challenge, the court expressly allowed the application for review of acts that are null and void ab initio, provided that they are followed by a judicial appeal in which the court renders that final judgment.