Tax Newsletter - October 2018 | Ruling requests

Corporate income tax

Brexit is a valid economic reason for applying the tax neutrality regime

Directorate General for Taxes. Ruling V2253-18, of July 26, 2018 

The requesting taxpayer intended to carry out a cross-border merger between a Spanish resident entity and another entity resident in the UK, in which the absorbing entity would be the Spanish resident entity. The primary aim of the merger is to provide the necessary flexibility to ensure that, after Brexit, the group will be able to provide services to its clients consistently throughout Europe, besides maintaining suitable conditions to ensure that employees can travel to other countries where necessary.

According to the DGT, these are valid reasons for applying the tax neutrality regime.

Corporate income tax

Hotel business carried on through investee is not line of business

Directorate General for Taxes. Ruling V2058-18, of July 11, 2018

A company owning a hotel that it leases to a subsidiary for the subsidiary to manage with its own material and human resources wanted to spin off the hotel business. The DGT took the view that the tax neutrality regime cannot be claimed for the spin-off because the assets to be transferred do not amount to a line of business.

Corporate income tax

Distribution of additional paid-in capital qualifies for exemption under article 21

Directorate General for Taxes. Ruling V2043-18, of July 11, 2018

A Netherlands resident entity, wholly owned by a Spanish company, made a distribution of additional paid-in capital in kind, by delivering to its shareholder a 100% ownership interest in another Spanish entity. The distribution was made at the market value of this latter entity. This transaction would need the Spanish shareholder to include in its tax base the positive difference between the market value of the received elements and their tax value at the company making the distribution.

This difference qualifies for the exemption under article 21 of the Corporate Income Tax Law because it may be treated as income from the transfer of shares.

Personal income tax

Directors not eligible for certain personal income tax exemptions

Directorate General for Taxes. Ruling V1984-18

The DGT summarized the special provisions on personal income tax in relation to salary income obtained by directors with executive functions.

This matter is particularly relevant as a result of application of the “bond” theory (teoría del vínculo), under which the Supreme Court has been holding that a senior manager leaves behind their employment relationship when they become part of the managing body. That employment relationship, it is said, is included in the new commercial relationship. In the DGT's view, this means that all the compensation of the new director is deemed to result from the commercial relationship.

This implies that, while remaining within the scope of salary income for personal income tax purposes, certain special provisions apply:

1. On the one hand, all types of compensation in kind are taxed, in other words, the cases of compensation that is not subject or is exempt envisaged for taxpayers with an employment relationship do not apply. Therefore, training courses, medical insurance contributions, meal or childcare vouchers, etc. are taxed. These types of compensation are taxed on their cost or market value as applicable.

2. Per diems for normal meal and overnight expenses are also taxed, unless they are expenses assumed on behalf of a third party and this can be proved.

3. The exemption may not be claimed for work performed in other countries.

4. The withholding tax rate will be the fixed 35% rate (or 19%, according to the entity’s net revenues).

Lastly, it is clarified that any types of compensation for performing director functions do not fall within the scope of controlled transactions.

Personal income tax, VAT and wealth tax

Clarification of treatment for various taxes of the lease of property with additional services  

Directorate General for Taxes. Ruling V2297-18, of August 7, 2018

The owner of a chalet intends to rent it through a company engaged in tourism services. Two options are proposed: (1) renting the property to the tourism services company for it to rent out the property and provide additional services on its own behalf, or (2) the owner renting out the property directly to the tenant, but hiring the additional services from the tourism services company.

The DGT examined the tax implications for three taxes:

1. VAT: In both scenarios the lease is subject and not exempt by being accompanied by additional services related to the hotel industry. The tax rate varies according to which arrangement is implemented. If the property is rented to the services company, 21% VAT must be charged by the owner (regardless of the rate that must be charged by the company to the tenant). If the property is rented directly to the tenant, the applicable rate is 10%.

2. Personal income tax: The rental of the property to the services company gives rise to income from movable capital. Conversely, the income obtained from renting directly to the tenant together with the services mentioned (even if through the services company) qualifies as income from economic activities.

3. Wealth tax: In neither case does the family business exemption apply in that, for the purposes of this tax, no economic activity is performed .

Personal income tax

Penalty for breaching minimum holding period for pension plan gives rise to loss from movable capital

Directorate General for Taxes. Ruling V2167-18, of July 20, 2018

An individual receives a reduction from a banking institution for transferring a pension plan to that institution, subject to the condition that the pension plan must be held for five years.

The DGT confirmed that if that holding period is not met, the penalty that the financial institution applies will give rise to a loss from movable capital.

Nonresident income tax

Severance payments for termination of employment contracts of nonresidents are taxed in Spain for period worked there

Directorate General for Taxes. Ruling V2188-18, of July 23, 2018

An entity has sent employees abroad, which makes them nonresidents. A number of workforce adjustments are going to be made through unjustified dismissals, objective dismissals and terminations by mutual accord.

Based on the contents of the commentaries on the OECD Model Convention, the DGT concluded that the severance payments made in any of the three types of termination will be deemed to derive from an employment relationship, and therefore the tax treaty article on income from employment (article 15, generally) will apply.

In general, it may be inferred from that article that only severance payments derived from work performed in Spain are taxable in Spain, in which case the exemption under the Personal Income Law for severance payments in respect of dismissal may apply (unless the termination is by mutual accord). To determine the portion of the severance payment that is deemed to be obtained in Spain, in general the amount must be distributed proportionally among the countries where the employment relationship was performed, by reference to the time worked in each country.

If other types of indemnification are received to remedy any type of loss (punitive damages, indemnification for discriminatory treatment, indemnification for damage to reputation), this type of income is taxable, in principle, only in the employee’s state of residence (article 21 of the Model Convention).

Under a specific rule, applying to terminations by mutual accord, if the severance is paid in monthly installments rather than as a lump sum and the former employee regains tax residence in Spain in the period in which the severance is paid, it will become taxable in Spain (under the principle of taxation on worldwide income).

Tax on economic activities

An unincorporated joint venture (UTE) carries on an economic activity separate and independent from that of its members

Directorate General for Taxes. Ruling V2033-18, of July 9, 2018

The DGT concluded that an unincorporated joint venture is treated as a separate taxable person for the purposes of the tax on economic activity with respect to the individuals or entities investing in it, and, as a result, it carries on an economic activity that is separate and independent from that of its members.

Applying this interpretation, the DGT explained, among other questions, that, for the purposes of the exemption from the tax on economic activities, regard must be had to whether or not the net sales/revenues from all the activities carried on by the unincorporated joint venture itself in the year are below 1 million euros.