Tax Newsletter - September 2018 | Judgments

Corporate income tax -State aid / ‘Tax lease’

EIGs may be beneficiaries of state aid

Court of Justice of the European Union Judgment of July 25, 2018, in case C-128/16 P

In a decision rendered on July 17, 2013 the European Commission concluded that the so called “Spanish tax lease” was state aid. The General Court set aside that decision in a judgment dated December 17, 2015 (cases T-515 and 719/13) because it considered that the EIGs could not be beneficiaries of the state aid, which was contrary to the Commission's arguments. In the General Court’s view, only the “investors” could be beneficiaries of the state aid (if it existed).

Going against the General Court’s arguments, the CJEU has now concluded that the EIGs may indeed be beneficiaries of state aid insofar as they are not simply vehicles channeling aid to the “investors”. For that reason, the CJEU has set aside the General Court’s judgment, which means that the Commission Decision mentioned above automatically comes back into force.

Following the setting aside of the General Court’s judgment, the CJEU has ordered reversion of the proceedings so that the General Court may rule on the grounds for setting aside submitted by the parties and which had not been analyzed by the General Court in its judgment; a decision that will ensure that the dispute will stay with us for a few more years.

Corporate income tax -State aid

The selectivity requirement in relation to state aid must be assessed on the basis of a correct determination of the system of reference

Court of Justice of the European Union Judgment of June 28, 2018, in case C-203/16 P

German tax legislation allows tax losses to be carried forward and offset against income in later years. To prevent tax evasion, German lawmakers restricted the ability to carry forward losses of companies that had ceased trading to legally and economically identical companies (known as the “rule governing the forfeiture of losses”).

In principle no exceptions were provided to the rule governing the forfeiture of losses (repealed with effect from January 2008). However, in certain cases involving the acquisition of shares to reorganize a company in difficulty, the tax authorities could allow the offset of prior years’ losses.

In this context, the European Commission adopted a decision holding that the restructuring clause amounted to “unlawful” state aid. This decision was confirmed by the General Court in a judgment dated February 4, 2016.

The CJEU upheld an appeal lodged against that General Court judgment by concluding that the Commission erred in law when determining the relevant reference framework for examining the selectivity of the measure at issue (it took the view that the framework was constituted only by the rule governing the forfeiture of losses whereas it should have had regard to the general loss carry-forward rule).

In relation to this the CJEU held that the selectivity of a tax measure cannot be assessed on the basis of a reference framework consisting of some provisions that have been artificially taken from a broader legislative framework. And on that basis the CJEU set aside the EC decision after concluding that an error in the determination of the reference framework against which the selectivity of the measure should be assessed necessarily vitiates the analysis of the condition relating to selectivity.

Nonresident income tax

Inbound expatriates taxed on principal residence

Madrid High Court Judgment of April 23, 2018

Taxable persons who become tax resident in Spain may elect to apply the “inbound expatriates regime” if a number of requirements are met. This regime implies basically that these taxable persons continue to be taxed as nonresidents for a few years subject to certain particular rules.

The nonresident income tax legislation generally applies the personal income tax legislation, which raises the issue of whether in the inbound expatriates regime the personal income tax rule applies which states that the principal residence is subject to tax on imputed income from real estate.

Madrid High Court concluded that this is not an option, because the inbound expatriate continues to be treated as a nonresident, which is not consistent with having their principal residence in Spain.

Tax on increase in urban land value

Judicial review courts contradict Supreme Court  

Supreme Court. Judgments of July 17 and July 18 2018

Madrid Judicial Review Court number 9 and Zaragoza Judicial Review Court number 2. Judgments of July 19, 2018

The Supreme Court confirmed in two judgments the interpretation settled in a judgment rendered on July 9, 2017, summarized in Tax Alert 12-2018, on the constitutional nature of the tax on increase in urban land value.

In short, the Supreme Court reiterated that the Constitutional Court only held to be unconstitutional article 107.1 and article 107.2.a) of the Local Finances Law when the tax is charged in instances where no increase in land value has arisen, and therefore any assessments where there has been an increase in value are not void. For these purposes, the court accepted that the taxable person is allowed to provide any means of proof or indication of the absence of increase in value (the sale and purchase deeds for the property, for example), and the burden of proving that land value has in fact risen therefore lies with the tax authorities.

Some judicial review courts, however, have continued to find that following the Constitutional Court’s judgments all assessments of the tax are void. They do not allow (and have expressly said so mentioning the supreme court judgment of July 9, 2017) “partial nullity” of the articles held unconstitutional by the Constitutional Court.

For the Madrid and Zaragoza courts the tax cannot be charged until the law is changed, insofar as there is no legal coverage for issuing assessments of the tax.

Tax procedure

An assessment arising from a procedure not set out in the law is void and does not toll statute of limitations

Supreme Court. Judgment of July 2, 2018

As we reported in Tax Alert 13-2018, the Supreme Court has found that assessments issued in inappropriate procedures (in this case, a verification of information procedure implemented by the authorities in an instance not set out in the law) are void as matter of law and therefore do not toll the statute of limitations.

Penalty procedure

Penalties not allowed on a company for infringements committed on its behalf but without its knowledge

Supreme Court. Judgment of July 17, 2018

In a criminal proceeding it was concluded that a number of acts were carried out by a third party without the company’s consent and prejudiced the company, and so the company was not criminally blameworthy. The Supreme Court considered therefore that the company could not be penalized under administrative law either.

It recalled in any event that had an administrative penalty been allowed it would have had to be based on express, sufficient and detailed evidence of a breach of the duties of surveillance held by the company (fault in vigilando), after examining the circumstances of the case and determining which specific acts by the company had determined an infringement of that obligation. 

Review procedure

New evidence is allowed in the economic administrative jurisdiction

Supreme Court. Judgment of September 10, 2018

As it had found a previous judgment of April 20, 2017, the Supreme Court affirmed that in relation to an economic-administrative claim the examining authority must consider all items of evidence submitted to it and which are relevant to provide a response to the claim that has been brought, even if that evidence was not produced to the tax management or audit authorities.

The only exception is where the late production of evidence is the result of dishonest or malicious intentions on the part of the interested party, which must be evidenced in the case record. 

Real estate tax

Restriction placed on exemptions for buildings in which an education service is provided

Supreme Court. Judgments of July 26 and July 27 2018

The Supreme Court has placed restrictions in these two judgments for claiming the exemptions from the real estate tax legislation for buildings in which educational services are provided.

In its judgment of June 26, 2018, the court affirmed that at public hospitals where educational services are provided also, by operation of law the requirement for “direct use” of the building for educational activities is not satisfied. Therefore the exemption provided for publicly owned buildings used directly for educational services does not apply to them.

In the judgment of June 27, 2018 it affirmed that, for the exemption provided for subsidized private teaching institutions, the owner of the teaching institution must also be the owner of the land and buildings used for teaching purposes.