Tax Bulletin May 2013

The calculation of the provision for tax-deductible impairments, in the case of group entities, jointly controlled entities and associates has become more complex since the entry into force of the new Spanish National Chart of Accounts and the subsequent amendment of the Spanish Corporate Income Tax Law, because tax law ignores accounting recognition rules completely.

In addition to the necessary reconciliation of the investee’s financial statements to Spanish GAAP, to determine the value of the decline in its equity for these purposes, the investee’s nondeductible expenses must be ascertained and whether there were any unrealized gains on acquisition that remain when the impairment is calculated.

The treatment for tax purposes of this item can mean a departure from the timing of recognition rules contained in the law which, generally speaking, allow deduction in the year in which a given expense is recorded for accounting purposes even if it is recorded in a later fiscal year than the year in which it was actually incurred. This special rule can lead to the interpretation (such as the one made by the Directorate-General of Taxes) that no adjustment can be made in this connection in a year other than the one to which it technically relates.

In a recent ruling, the Directorate-General of Taxes stated that this “clear separation between years” when it comes to the impairment of shares can also be extended to the time of the transfer of the shares and that it also affects any losses that may be incurred on that transfer.

Specifically, the view of the Directorate-General of Taxes is that:

We are dealing with an impairment purely for tax purposes. Therefore, any provision for accounting purposes will be nondeductible and the impairment for tax purposes must be reflected by way of an adjustment to book income in the relevant corporate income tax return.

Because they are adjustments to book income, an impairment cannot be deducted in a year other than the year in which it was incurred, so, if in a given year the relevant impairment for tax purposes has not been deducted, the only way to do so will be to apply to correct the tax return for that year. If the correction has not been made, in the event the shares are sold, the portion of the loss equal to the impairment for tax purposes not deducted at the time will not be deductible.

As an exception, the impairment for tax purposes from another preceding year can be used where in that year equity was negative and there was not enough cost to use the whole of the deductible loss.

The stream of ruling requests appearing on this subject shows that the impairment of shares is currently widespread among corporate groups and also that it is subject to complex accounting and tax rules. In light of the administrative rulings in this respect, it is advisable to carry out a thorough analysis of its effects.

1. JUDGMENTS

• 1.1 Corporate income tax.- An “exit tax” is contrary to the freedom of establishment where a company transfers its residence to another member state (Court of Justice of the European Union. Judgment of April 25, 2013 in case C-64/11)
• 1.2 Collection procedure.- Late-payment interest relating to the refund of a tax contrary to EU law (Court of Justice of the European Union. Judgment of April 18, 2013 in case C-565/11)
• 1.3 Corporate income tax.- Depreciation of a building for which the lease agreement does not provide for renewals can be taken by reference to the term of the agreement (Madrid High Court. Judgment of April 17, 2013)
• 1.4 Corporate income tax.- Sum-of-the-digits depreciation is compatible with a reduction in useful life due to a dual shift if it reflects an actual decline in value (National Appellate Court. Judgment of February 7, 2013)
• 1.5 Personal income tax.- Having an “employee and premises” is not an essential condition to consider that leasing real estate constitutes an economic activity, although it is an important piece of evidence (National Appellate Court. Judgment of February 28, 2013)
• 1.6 Personal income tax.- The special tax-exempt status of per diems for personal income tax purposes only applies to income obtained from an employment relationship (High Court of the Principality of Asturias. Judgment of January 30, 2013)
• 1.7 Enforcement of secondary liability.- The sole shareholder and director cannot challenge the facts of the case again in enforcement of secondary liability for company’s tax debts (National Appellate Company. Judgment of February 18, 2013)
• 1.8 Inspection proceeding.- The classification of a transaction by the tax inspectors with respect to a taxpayer is binding on the inspectors for other taxpayers in an identical case (National Appellate Court. Judgment of February 14, 2013)

2. DECISIONS AND RULINGS

• 2.1 Corporate income tax. Verification of tax credits generated in a statute-barred fiscal year but taken in year open for review in which General Taxation Law 58/2003 is in force (Central Economic-Administrative Tribunal. Decision of March 21, 2013)
• 2.2 Corporate income tax – Deductibility of finance costs in intragroup transactions (Directorate-General of Taxes. Ruling V0398-13, of February 11, 2013; Rulings V0878-13, V0880-13 and V0882-13, of March 19, 2013)
• 2.3 Corporate income tax – Effects of subrogation, for no consideration, to the debtor position of another company (Directorate-General of Taxes. Ruling V0854-13, of March 19, 2013)
• 2.4 Corporate income tax – The impairment of investments in group entities, jointly controlled entities and associates, is only deductible in the fiscal year in which the underlying book value decreases (Directorate-General of Taxes. Ruling V0757-13, of March 12, 2013 and ruling V0873-13, of March 19, 2013)
• 2.5 Corporate income tax. Asset revaluation may be applied to construction in progress (Directorate-General of Taxes. Ruling V0724-13, of March 11, 2013)
• 2.6 Personal income tax.- Simulation exists in the interposition of a company between a professional services firm and the professional partners working at that firm (Central Economic-Administrative Tribunal. Decision of March 21, 2013)
• 2.7 Personal income tax.– Indemnification of the withholding agent by the party subject to withholdings where withholding deficiency is assessed (Directorate-General of Taxes. Ruling V0827-13, of March 14, 2013)

3. LEGISLATION

• 3.1 Corporate income tax and nonresident income tax returns
• 3.2 Forms 108 and 208 (asset revaluation) and forms 202 and 222 for making corporate income tax prepayments
• 3.3 Form 583 for the tax on the value of electricity production