Tax Newsletter - November 2020 | Requests for resolutions
Corporate Income Tax. – The accounting and tax treatment of provisions for tax contingencies has been revised
Directorate General for Taxes. Resolutions V2937-20 and V2939-20 of September 30, 2020
The requesting entity, which had elected the SOCIMI (i.e. Spanish REIT) regime, purchased a residential building on which it self assessed stamp tax and claimed the 95% reduction allowed for entities of this type. In view of the likelihood that it would forfeit the right to claim the regime, it recognized a provision for the expense that a tax adjustment would cause.
In a report requested from it, the Spanish Accounting and Audit Institute (ICAC) noted that tax contingencies, arising from an audit report or otherwise, must give rise to the recognition of a provision for taxes equal to the estimated amount of the tax debt (tax liability, interest and penalty). Each component of the tax debt must be recognized separately.
Based on the principle given by the ICAC, the tax treatment is as follows, according to the DGT:
a) Tax liability: the stamp tax payable on the purchase of the buildings must form part of the acquisition price of the buildings, insofar as it is not directly recoverable by the public finance authority. Therefore, the valuation of the buildings must be corrected in respect of the unpaid tax liability, together with its accumulated depreciation, and the expense or revenue relating to prior years must be recognized directly in equity.
The depreciation of the building is subject to article 11.3.1 of the law (timing of recognition rules for revenues and expenses).
b) The period interest expense must be recognized as a finance cost, which forms part of net financial income. These expenses are deductible although subject to the limit on the deduction of interest set out in article 16 of the law.
c) If the penalty is imposed it will give rise to the recognition of an extraordinary expense which will appear in the “other income/expenses” caption in the income statement, forming part of operating income/loss”.
Although the DGT does not examine this in its resolution, that expense is not deductible.
Corporate income tax.- The payment of interest by a worker to their employer on a loan is not subject to withholding tax
Directorate General for Taxes. Resolution V2846-20 of September 22, 2020
The requesting entity was going to make a loan to an employee.
According to the DGT, no tax has to be withheld from the interest payments because the payer is an individual who does not carry on an economic activity, not the withholding agent, according to the legislation on the tax.
Corporate income tax.- A line of business exists, even if the entity performing the spin-off keeps some of the employees and assets needed for the spun-off business
Directorate General for Taxes. Resolution V2844-20 of September 22, 2020
In a cross-border partial spin-off, entity A will transfer its sales and marketing business to entity B, although the employees working in support services for that business will continue to be hired by entity A. However, since entity B will also need support services, a services agreement will be concluded between entity A and entity B.
The DGT stated that from the legal definition of “line of business” it may be inferred that the reach of that definition is not affected by not including among the spun-off assets and liabilities any element which may have been used in operations at the transferor, provided that the spun-off business is conducted in similar conditions before and after the transfer.
Namely, if that services agreement allows the marketing activities to continue to be conducted in the same way as they had been conducted before the spin-off, the fact of not transferring the employees in support services does not prevent the transferred elements being classed as a line of business.
Therefore, it was concluded that the described partial spin-off of a line of business falls within the definition provided in the neutrality regime for it to apply (provided there are also valid economic reasons).
Corporate income tax.- The neutrality regime does not apply to non-monetary contributions of shares in resident entities to a foreign company
Directorate General for Taxes. Resolution V2827-20 of September 21, 2020
The request concerned whether the tax neutrality regime applies to a non-monetary contribution in which an individual would transfer all of the shares they owned in various entities resident in Russia to a newly created entity also resident in that country, receiving in exchange all the shares in that entity.
The DGT concluded that because the newly created entity is resident in Russia and does not operate in Spain through a permanent establishment that uses the contributed assets, the necessary requirements for the non-monetary contribution to qualify for the special tax regime are not met.
Personal income tax, corporate income tax and transfer and stamp tax. – The DGT analyzes the tax effects of the acquisition of own shares for redemption in exchange for a temporary pension
Directorate General for Taxes. Resolution V2912-20 of September 25, 2020
In relation to the withdrawal of a shareholder, it was agreed that the shareholder would deliver their shares to the company for immediate redemption, in exchange for a temporary pension. The temporary pension would expire at the end of its term or upon the death of the recipient depending on whichever occurred first (none of the pension would be received by the former shareholder's heirs or legatees).
The DGT analyzed the treatment of this transaction and concluded as follows:
a) For personal income tax purposes, the shareholder obtains a capital gain or loss which must be quantified according to a combined interpretation of the special rule on the withdrawal of shareholders and the special rule on transfers of assets in exchange for a temporary or lifelong income annuity.
Namely, they will obtain a capital gain or loss on the transfer of the shares, equal to the difference between the actuarial present financial value of the agreed pension (provided that it is not lower than the normal market value of the shares, in which case this latter value would be used) and the acquisition value of those shares. The capital gain or loss must be reported in the taxable period in which the ownership of the shares is transferred and the income becomes payable.
Moreover, the temporary income annuity will give rise to income from movable capital which has to be reported in the taxable period in which it is payable.
b) Neither the setting up of the pension or the transfer of the shares are subject to stamp tax because they are contractual mechanisms that are not tangible in nature and cannot be registered at the Property Registry. However, the transfer of the shares could be subject to transfer tax under the transfers for consideration heading if article 314 of the Securities Market Law applies (companies with real estate assets).
c) For corporate income tax purposes (after requesting a report from the ICAC), it was concluded that the company, on acquiring its own shares for redemption, will reduce its shareholders’ equity. Firstly, it will lower its share capital, and, in respect of the difference between the par value of the shares and their fair value, its reserves (taking into account that as payment for the shares the company would set up a temporary pension for the shareholder, which must be valued at fair value).
However, if the agreed consideration did not match the fair value of the shares, the economic substance of the transaction as a whole would have to be analyzed to determine its treatment for both accounting and tax purposes. This analysis will have to take into account that, due to their degree of involvement, the shareholder and the company are related companies, which will make it necessary to price transactions between them at arm’s length.
Personal income tax. – How to calculate withholdings on prizes paid partly in cash and partly in kind
Directorate General for Taxes. Resolution V2774-20 of September 10, 2020
The personal income tax legislation states that there is no obligation to withhold tax on prizes if their withholding tax base amount does not exceed 300 euros.
For prizes made up of two components (cash and a payment in kind) the obligation to withhold tax exists if those two components combined exceed a withholding tax base amount of 300 euros. If so, the procedure is as follows:
a) From the cash component, an amount of tax equal to 19% must be withheld.
b) From the payment in kind component, an amount of tax must be withheld equal to 19% of the sum of the acquisition value or cost for the payer plus 20%.
Personal income tax.- The medical retainer fee offered by a clinic and giving access to the medical services it provides is not deductible as a medical insurance premium
Directorate General for Taxes. Resolution V2738-20 of September 7, 2020
A health clinic gives its clients the option of arranging a medical retainer fee that gives them access to its medical services.
According to the DGT:
a) For the purposes of determining net income from economic activities, insurance premiums are allowed to be deducted if they relate to medical insurance and only the portion relating to cover for sickness or health care, and this right does not include other types of insurance (such as accident insurance), or other types of cover.
b) Therefore, in the examined case, the paid amounts are not treated as deductible expenses for the purpose of determining net income from economic activities.
Wealth tax.- A cash contribution to a Spanish silent investment agreement ('contrato de cuentas en participación') is reported at its market value on the date the tax becomes payable
Directorate General for Taxes. Resolution V2808-20 of September 16, 2020
The resolution involved analysis of the treatment for wealth tax purposes of a contribution, as investor, to a silent participation agreement.
According to the DGT, this contribution is a transfer of own funds to third parties and gives rise to a collection right for the investor which, due to having financial content, will form part of the investor’s net worth.
Its taxable value must be determined under article 24 of the law on the tax for property and rights with financial content not covered by other articles, in other words, its market value on the date the tax becomes payable (not under the rules set out for interests in entities).
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