Tax Newsletter - October 2020 | Resolution requests

Corporate income tax.- Bad debt provision for a credit that should not have been recorded is not deductible

Directorate General for Taxes. Resolution V2671-20 of August 24, 2020

The issue submitted for resolution concerned a company from which a worker stole money held in a bank account. After a criminal complaint had been filed, the worker confessed the illegal appropiation and stated that he was unable to refund the money. For that reason, a few years later the company recorded a debt owed by the worker, but was considering treating it immediately as an impairment loss because it was more than unlikely that the company would not recover the stolen funds. It was asked whether that impairment loss could be treated as a deductible expense.

After receiving a request for the accepted standard, the Spanish Accounting and Audit Institute (ICAC) replied that:

a) The accounting records must be reviewed, to correct the balances in the current account, adjust the value of assets and record the relevant revenue or expense relating to prior years, in respect of the cumulative effect of variations in assets and liabilities, in a reserves caption (due to involving an accounting error).

In the analyzed case, the cumulative effect of those adjustments seems to be a charge to a reserves caption, in respect of the extraordinary expense caused by the theft.

b) However because the worker has stated that they do not have the stolen money and the requesting company considers it more than unlikely that it will recover the stolen money, there is no need to record a debt from that worker.

From that standpoint, for corporate income tax purposes:

a) In respect of the charge to reserves arising from the theft, it would allow a deductible expense on the corporate income tax return in the fiscal year the charge to reserves was made, as long as it was not incurred in a statute-barred period, because in that case, if the expense were deducted, then tax would be reduced.

b) The impairment loss for the debt is not deductible, due to incorrect recognition (because the debt should never have been recorded in the first place).

 

Corporate income tax.- Dividends paid before joining a tax group cannot be eliminated to calculate the capitalization reserve

Directorate General for Taxes. Resolution V2670-20 of August 24, 2020

The requesting company owned 56% of company A (parent company of a tax group), which paid a dividend to it in 2015. Later the requesting company increased ownership of A to 75%, which caused the disappearance of the tax group headed by A. In 2016 the requesting company became the parent company of a new tax group joined in by A.

In relation to use of the capitalization reserve in 2016, the DGT noted the following:

a) The increase in equity within the tax group (a necessary condition for using the reserve) must be calculated by reference to the sum of the equity figures of all the companies belonging to the group and the eliminations and inclusions of income/losses arising from intercompany transactions, all of which must be done under accounting consolidation rules.

b) Because in 2015 the requesting company did not belong to the tax group headed by company A, the dividends paid by company A to the requesting company did not qualify as intercompany dividends for the purpose of calculating the elimination under accounting consolidation rules; and therefore do not have to be eliminated for calculation of the increase in equity to be taken into account for use of the capitalization reserve.

 

Corporate income tax.- Access for minority investors to the spun-off business is valid reason for claiming neutrality regime

Directorate General for Taxes. Resolution V2618-20 of August 3

It was intended to spin off the business of operating telecommunications infrastructure belonging to company B by transferring it by universal succession to newly created company C. Later, company A, owning the whole of company B performing the spin-off, and the beneficiary of the spin-off, company C, will transfer its ownership of company C to its Netherlands resident sole shareholder, company D, through the payment of dividends out of reserves. Then company D will transfer the acquired ownership interest to a holding company also resident in the Netherlands and belonging to the same group of companies.

It was noted, however, that the group intends to allow minority investors to take up a stake in this holding company (never above 50%).

The reorganization was being considered in the context of the multinational group's new strategy, after it decided to split up its passive infrastructure business and its local cellphone operators into two separate businesses. By separating its telecommunications business and the operation of that infrastructure and grouping the latter into a holding company, it intends to:

a) Achieve more specialized management and greater efficiency in the selling of infrastructure.

b) Give visibility to the spun-off business and make it give value to investors.

c) Provide also the opportunity to obtain external funding by giving access to any new minority investors who want to invest in the spun-off business, without letting this decision affect the multinational group’s other lines of business.

The DGT concluded that the main reason underlying the spin-off performed by company B does not seem to be to later transfer the shares of the beneficiary company, achieving lower tax than would have been the case in the event of a direct transfer, by company B, of the elements used in the spun-off business, therefore it may be concluded that the reasons submitted for performing the proposed restructuring could be considered economically valid; and the neutrality regime may be claimed.

 

Corporate income tax.- Minimum holding period to be eligible for the exemption provided in article 21 of Corporate Income Tax Law does not include the time the interest was owned by a related party who is an individual

Directorate General for Taxes. Resolution V2519-20 of July 23, 2020

An individual contributed shares in a company to another company in an unprotected transaction. Later, the recipient of the contribution transferred a portion of the received shares. It was asked whether the period in which the individual owned the shares before the contribution could be included to calculate the minimum holding period before this second transfer (in relation to the relief for income arising from the transfer).

The DGT concluded that because the previous owner of the shares was an individual not a company (and therefore cannot belong to a group within the meaning of article 42 of the Commercial Code), the period in which that individual owned the shares does not count for the purpose of compliance with the minimum holding period.

 

Personal income tax.- Exemption for awarding shares cannot be claimed where the minimum holding period is not expected to be met

Directorate General for Taxes. Resolution V2480-20 of July 21, 2020

The Personal Income Tax Law allows to apply an exemption for shares awarded to workers. To be eligible for the exemption the shares must be held for at least three years.

The request concerned a worker who had not met that holding period because the shares from their employer were purchased by a third party (following a tender offer squeezing out the minority shareholders). When the shares were awarded, the worker was informed about the imminent tender offer.

The DGT recalled that the holding requirement cannot be deemed not to be met in the event of restructuring transactions in which employees exchange their shares for others (in the parent company, for example, for shares in another company which, through the exchange, becomes the main shareholder of that parent company). This conclusion was provided in binding resolution V1222-16 of March 28, 2016.

It noted however that the described case is a different situation for two reasons:

a) Because the purpose for which the tax benefit is allowed is not met, namely encouraging worker participation in the company, by conferring on them the economic and non-economic rights of shareholders.

b) Because the squeeze-out was notified by the buyer several months before the award of shares to the employee, the company already knew that the minimum holding period would not be met.

 

Personal income tax.- To be eligible to apply the exemption for work performed abroad it is irrelevant how intragroup services have been priced

Directorate General for Taxes. Resolution V2339-20 of July 09, 2020

The requesting company belongs to an international group engaged in strategic consulting services for senior management. Certain employees in organization departments (working in administration services, human resources or financial services), provide services for other offices in the group which require them to work abroad. These services have traditionally been billed to the group using the cost-plus method. Recently, however, the group has chosen to use the profit-split method, so there will be no direct billing of the costs of each period spent abroad to the company receiving the services. It was asked whether this change to the transfer pricing policy affects the exemption for work performed abroad.

The DGT concluded that it would be eligible for the exemption if (i) the recipients of the services are nonresident companies or permanent establishments abroad, (ii) the services provide an advantage or benefit to those recipients and (iii) for the services to be provided a worker physically travels abroad (it needs to be recalled also that the destination country must charge a tax identical or similar to Spanish personal income tax, which is deemed to take place where it has signed a tax treaty with Spain). This will be true regardless of the pricing used for controlled transactions.

 

Personal income tax.- Tax paid on income obtained incorrectly may be recovered and must be refunded

Directorate General for Taxes. Resolution V2313-20 of July 07, 2020

The requesting individual, who was chairman of a board of directors, was convicted of an offense of illegal appopriation due to receiving compensation prohibited by a provision in the law or bylaws. In a judgment they were ordered to pay indemnity to the injured party, equal to the amount unlawfully received. This amount was reported at the relevant time as salary income for personal income tax purposes.

The DGT noted that the indemnity for civil liability is a justified capital loss which does not result from an act of consumption, is not a gift, and does not come from gambling. It concluded however that because it arose from a crime of illegal appropriation it is not computable as a loss for personal income tax purposes.

However, because it had been taxed as salary income for personal income tax purposes, a correction of the initial self-assessment can be made to obtain the relevant incorrect payment.

 

Nonresident income tax. – The DGT gives its view on deduction of certain expenses by a branch

Directorate General for Taxes. Resolution V2528-20 of July 24, 2020

The issue was submitted by the branch of a German company owned by a Japanese company (75%) and by a Belgian Company (25%). The branch imports, exports, and distributes electronic components for the automotive industry. The Japanese company owns a non-standard software program, usable in the logistics field, which is assigned under license to various group companies, including the branch.

The DGT took the view that:

a) The payments to the Japanese company in respect of royalties for the right to use the software are deductible at the branch, because they relate to management software which will be used by the branch in its activity and will be the balancing entry for revenues relating to the permanent establishment (even though it does not have its own legal personality).

b) Since the payments are made to a company resident in Japan, if this company produces a certificate of residency in that country, the Japan-Spain tax treaty will be applicable, based always on the assumption that the source state is Spain not Germany (country of residence of the branch’s head office) and that the conditions set out in article 12.5 of the Japan-Spain treaty are met, which states that “Where, however, the person paying the royalties, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment in connection with which the liability to pay the royalties was incurred, and such royalties are borne by such permanent establishment, then such royalties shall be deemed to arise in the Contracting State in which the permanent establishment is situated”.

Therefore, under the treaty, the branch is required to withhold tax at the maximum 10% rate on any royalties it pays to the Japanese company.

 

Nonresident income tax.- The migration of an LLC to Spain is not subject to tax in this country

Directorate General for Taxes. Resolution V2353-20 of July 9, 2020

Company A, resident in the US, owns:

a) 100% of a Limited Liability Company (LLC) resident in the US, sole shareholder of a limited liability company resident in Spain. The LLC's assets at the Spanish company do not consist mainly, directly or indirectly, of real property located in Spain.

b) 100% of the share capital of an Irish company.

It was intending to carry out a restructuring in which company A would transfer its interest in the LLC to the Irish company through a share exchange. Later the LLC would relocate its registered office and place of effective management to Spain, and take the legal form of a Spanish limited liability company, though retain the same legal personality, from the standpoint of Spanish and US corporate law.

According to the DGT:

a) The income arising from the exchange may be characterized, for the purposes of applying the Spain-United States tax treaty, as a capital gain and therefore the provisions in article 13 will have to be applied. Because the transferred shares do not relate, directly or indirectly, to companies whose assets consist mainly of real property situated in Spain, or entitle the owner to the enjoyment of any real property in that country, the potential capital gain may only be taxed in the United States.

b) Neither the relocation nor the change of the LLC's legal form to a Spanish limited liability company will alter its legal personality. Therefore, they will not determine the generation of taxable income for either the company or the shareholders in Spain.

 

Wealth tax.- DGT analyzes various issues related to family business exemption for businesses engaged in property leasing

Directorate General for Taxes. Resolution V2325-20 of July 07, 2020

A married couple own 100% of a company engaged in property leasing. The wife is sole director of the company and carries out management activities, for which she receives a monthly income of €900. Moreover, a daughter of the couple (who does not live with them) has an employment contract for full-time work with the company, and receives just over €1,000 a month as administrator. They are considering making her the sole director of the company (replacing her mother), while retaining her employment contract, as a business administration graduate. She would not receive any compensation for her services as director; and her income under her employment contract would be increased by reference to her new category.

In relation to the wealth tax exemption for shares in the family business, the DGT concluded that:

a) For property leasing to be regarded as an economic activity, the company must have at least one individual employed under a employment contract for full-time work. This requirement may only be considered met if the contract is an employment contract under the labor legislation in force. It makes no difference for these purposes whether the employed individual is a family member.

In other words, if (as described in the request) the daughter of the requesting individual becomes sole director of the company, this requirement will only be deemed met if she retains her employment contract for full-time work and receives compensation for the activities she carries out under that employment contract, which must be activities related to managing the leasing of properties.

In short, the requirement will not be deemed met if the employment contract is a senior management contract because, in that case, due to also being sole director of the company, her relationship is a commercial not an employment relationship.

b) In relation to the requirement related to management activities being carried out at the company for which compensation is received representing more than 50% of income from business or professional activities and personal work:

• What matters is not so much the name of the position as whether the position involves activities for the administration, management, running, coordination and operating of the organization concerned. The activities must be carried out at the owned company.
• It is not a requirement, in any case, for the person carrying out the management activities to own shares, as long as the requirement relating to shares is met within the family group.
• The fact of providing services as director of the company for no compensation does not mean, in itself, failure to satisfy the requirement relating to management activities, if it is evidenced that the activities for the administration, management, running, coordination and operating of the organization concerned are carried out and that the income received for those activities represents more than 50% of the person’s aggregate income from business or professional activities and professional work. Therefore this requirement cannot be seen to be met in the described case.

 

Tax on economic activities.- The activity of buying and selling securities for a company's own benefit is not subject to the tax on economic activities

Directorate General for Taxes. Resolution V2568-20 of July 28, 2020

The DGT analyzed the case of a company owned by two shareholders and engaged in the activities of an insurance agency, which buys and sells shares (for its own benefit) on the Spanish stock market through a broker. It was asked whether it should be registered for the tax on economic activities in respect of that activity.

The DGT noted that an activity of that type consisting of buying and selling securities does not meet the requirements specified in the law to be treated as an economic activity for the purposes of the tax on economic activities, so the company would not have to register that activity.