In the tax arena, the most talked about news in recent weeks has been the rise in personal income tax rates for high incomes and the increase in the taxation of SICAVs (open-end investment companies), measures contained in the General State Budget Bill for 2011 laid before Parliament on September 30, 2010.
Although it is still a Bill, which will be intensely debated in Parliament by the various political groups, these changes will most likely be approved, and so we thought it fitting to provide a brief preview of them in this Bulletin (see section 4.1).
On tax rates, the reform is clear and simple. It consists of including two new brackets in the current tables: 44% for income above €120,000.20 and 45% for income above €175,000.02.
The change affecting SICAVs is somewhat harder to explain. The appropriateness of a preferential system for investors through these vehicles has regularly been called into question. There was controversy over whether or not the tax authorities have jurisdiction to review the fulfillment of the corporate law requirements to apply the regime, which was followed by a debate as to its acceptability in the current environment where tax hikes are becoming commonplace in the economic downturn.
The Bill, in its present form, does not change the tax treatment of the SICAVs themselves (which continue to be taxed at a flat reduced rate of 1%), but of their members, who will be taxed when they obtain cash from their investments.
Until now, the cash obtained from a SICAV by the fund’s investors, by reducing capital or distributing additional paid-in capital, did not trigger capital gains, provided the cash obtained did not overstep the cost of the investment. The reform seeks to avoid this deferral of taxation by establishing that capital reductions or distributions of additional paid-in capital carried out by SICAVs generate income from movable capital, subject to certain limits and requirements.
The proposed new rules would apply to both SICAVs and collective investment vehicles akin to SICAVs registered in States other than Spain, for reductions or distributions carried out since September 23, 2010.
In addition to these two new changes, which have been widely discussed due to their media impact, another feature that we believe calls for comment is the limit introduced in the Bill for taking the 40% personal income tax reduction for multi-year salary income. Thus, according to the wording of the Bill, the amount to which taxpayers may apply the reduction for salary income that is generated over a period exceeding two years, or which is notably multi-year in nature, may not exceed €300,000 (the current legislation does not contain a quantitative limit, and the Sustainable Economy Bill provided for this cut, but up to the limit of €600,000). This limit would start to apply on January 1, 2011, if it is finally approved.
1.1. Personal income tax – It is not necessary to change registered domicile to take reduction for geographical mobility, it is enough to evidence, by any means permitted by law, that there has been a change of principal residence (High Court of Extremadura. Judgment of April 29, 2010)
1.2. Value added tax – Treatment of (i) collections for steps taken in relation to commercial bill debts and return of unpaid amounts and of (ii) transfers of securities with non-optional repurchase agreement (National Appellate Court. Judgment of July 7, 2010)
1.3. Value added tax – To evidence deductibility of input VAT paid, invoice or duplicate thereof must be kept (National Appellate Court. Judgment of May 18, 2010)
2. DECISIONS AND RULINGS
2.1. Corporate income tax and value added tax – Sponsorship of Support Programs for Events of Exceptional Public Interest (DGT ruling V1588-10, of July 13, 2010)
2.2. Corporate income tax – Investment in construction of wind farm does not qualify for tax credits for environmental investments (DGT ruling V1532-10, of July 8, 2010)
2.3. Corporate income tax – Various issues regarding treatment of tax credit for reinvestment in consolidated tax groups (DGT ruling V1511-10, of July 6, 2010)
2.4. Corporate income tax – Recognizing goodwill on acquisition of shares is not correct and therefore cannot be written-off for tax purposes (DGT ruling V1485-10, of July 1, 2010)
2.5. Personal income tax – Amounts paid for pre-retirement implemented through “contracts in abeyance” are not amounts paid for mutually agreed termination of employment (Central Economic-Administrative Tribunal. Decision of May 19, 2010)
2.6. Value added tax – VAT assessed against non-established trader should not be refunded under non-established trader refund procedure until final judgment or decision has been handed down on appropriateness of administrative assessment (Central Economic-Administrative Tribunal. Decision of May 25, 2010)
2.7. Inspection proceeding – Decision to refer proceedings to Public Prosecutor’s Office is not eligible for economic-administrative claim (Central Economic-Administrative Tribunal. Decision of May 11, 2010)
3.1. Approval of the rules for the preparation of consolidated financial statements and amendment of certain measurement bases in the Spanish National Chart of Accounts.
4. DRAFT LEGISLATION
4.1. General State Budget Bill for 2011