Publications

Corporate income tax

Interest on participating loan not deductible if it actually implies a contribution to the borrower’s equity (legislation prior to 2015) 

National Appellate Court. Judgment of November 11, 2019

Two related entities signed a participating loan for a twenty-year term that would start to run from when the agreement was recorded in a public deed. That public deed never took place, and besides, the agreement did not stipulate any consequences in the event of a breach of that term.

The agreement set out the option of swapping the loan for shares in the borrower shares and allowed termination by agreement between the parties.  It moreover provided that, if the lender assigned its rights associated with the loan, it would also have to transfer to the same acquirer its shares in the borrower.

According to the National Appellate Court, this all suggests that what is actually taking place is a contribution to the investee’s equity. For that reason, the court set aside the argument that the finance costs in relation to the agreement were deductible.

It must be taken into account that the law as it currently stands expressly states that the finance costs associated with participating loans are not deductible, unless the loans were entered into before June 20, 2014.

Personal income tax

The employer has to substantiate that paid per diems relate to work-related travel

Supreme Court. Judgments of January 29 (1), and February 6 (2) 2020

The Personal Income Tax Law states that certain transport and subsistence per diems are not taxable, subject to the requirements in the personal income tax regulations. One of the requirements to be eligible for the exemption for certain per diems is to be able to prove the date and place of travel and the reason for travelling. If the per diems are not taxable, the payer does not have to withhold tax and as a result the worker will not have to be taxed on those per diems.

In the cases examined by the Supreme Court in these three judgments, tax auditors had disallowed the exemption because the worker had not been able to prove the circumstances mentioned above in relation to certain per diems for subsistence expenses. When it examined the proof of these circumstances in relation to the exempt per diems, the court concluded as follows:

Nonresident income tax / investment funds

Law laying down requirements for exemption on dividends to apply to investments funds does not constitute restriction on free movement of capital, unless it discriminates against nonresident funds

Court of Justice of the European Union. Judgment of January 30, 2020. Case C-156 /17

A German investment fund received dividends distributed by companies established in the Netherlands on which tax was withheld. The investment fund applied for a refund of the withheld tax because it considered that the dividends were exempt. The application was refused because, under the Netherlands legislation, the exemption was only available for FIE investment funds meeting a number of requirements, including:

• Their shares must be admitted to trading on a regulated market in financial instruments, so it can be verified whether their shareholders satisfy certain requirements.
• The distribution of dividends to shareholders must be made within 8 months of the end of the fiscal year.

The investment fund had not proved that the conditions had been satisfied, according to the Netherlands tax authorities. The interested party argued, however, that it did satisfy them. Namely:

• In relation to the first requirement mentioned, it argued that the chosen trading system did not enable it to know who the shareholders are.
• In relation to the second, it demonstrated that the German legislation required tax to be levied on income from investments, even if no actual distribution of dividends had taken place, which meant that in practice this condition had been satisfied.

The CJEU was asked to rule whether provisions of the type found in Netherlands legislation restrict the free movement of capital. Specifically, three questions were referred for a preliminary ruling, in relation to which the CJEU concluded as follows:

• Eligibility for the exemption only for funds meeting the conditions in the law: The CJEU concluded that member states are free to provide for a specific tax regime applicable to the dividends received by investment funds, and to define the material and formal conditions which must be respected to benefit from such a regime. When exercising their fiscal autonomy member states must nevertheless respect the requirements of EU law and, in particular, there cannot be any restriction on the free movement of capital.
• Refusal to grant the exemption to a fund not resident in the Netherlands that has not provided sufficient proof of satisfaction of the conditions mentioned: The CJEU recalls that the tax authorities of a member state are entitled to require the taxpayer to provide any proof they consider necessary to determine whether the conditions for a tax advantage provided for in the legislation concerned have been met. However, in order not to make it impossible or excessively difficult for a non-resident taxpayer to obtain a tax advantage, it cannot be required to produce documents which are absolutely identical to the documentary evidence laid down in the applicable legislation for resident funds.
• Refusal of the exemption for a fund not resident in the Netherlands that does not distribute the income on its investments within a certain period of time, even if this income has been taken into account in the tax levied in the state of residence of the shareholder as though the income had actually been distributed: The CJEU concluded that the legislation does not infringe the principle of free movement of capital due to refusing to allow the exemption on the ground of failure to provide proof of requirements such as that relating to the identity of the shareholders (provided that this does not in fact only disadvantage non-resident investment funds); but it does infringe this principle if the exemption is refused because dividends have not actually been distributed within a certain period of time, if it is evidenced that the shareholders must have been taxed in their state of residence as if they had received the dividends.

Tax on stock exchange transactions

It is not a restriction on the freedom to provide services for the legislation on the tax on stock exchange transactions to establish differences depending on the residence of the professional intermediary

Court of Justice of the European Union. Judgment of January 30, 2020. Case C-725 /18

Belgian law provides that transactions concluded or executed in Belgium in respect of Belgian or foreign government stocks are subject to the tax on stock exchange transactions. For these purposes transactions concluded or executed in Belgium include (among others) transactions where the order relating to them is given directly or indirectly to an intermediary by an individual who has their habitual residence in Belgium or by a legal entity that has a place of business or permanent establishment in Belgium. The intermediary may be either resident in Belgium or a nonresident. However, the legislation of that state determines as follows:

• If the intermediary is resident in Belgium, the intermediary is liable for the tax and required to withhold and report the tax liability.
• Where the intermediary is not resident in Belgium, the issuer of the order (individual or legal entity resident in Belgium) is liable for the tax and required to report the tax liability, and the intermediary is not required to withhold the tax.

The CJEU concluded that this tax respects the principle of freedom to provide services on the basis of the following observations:

• It was made clear that the Belgian legislation establishes a difference in treatment which may dissuade the recipients of financial intermediation services resident in Belgium from using the services of non-resident service providers, while making it more difficult for these to offer their services in that member state.
• However, such a restriction may be justified in that (i) it ensures the effectiveness of tax collection and of fiscal supervision and (ii) prevents any unfair competition between resident and non-resident professional intermediaries (insofar as residents are required to withhold tax whereas non-residents are not).
• Additionally, the legislation at issue does not go beyond what is necessary to achieve the sought objectives, in that it provides a number of options (the non-resident intermediary is able to appoint a representative for the purpose of carrying out certain formalities, for example) that limit the restrictions in the law to what is necessary to attain its sought objectives.

Transfer and stamp tax

UTEs are taxable persons for stamp tax 

Supreme Court. Judgment of January 30, 2020

Two companies acquired equal undivided interests in a number of properties and recorded in the public deed for the sale that for everything related to those properties the acquirers had set up an UTE (temporary joint venture).

The UTE filed a stamp tax self-assessment return, on which they applied for relief due to considering that UTEs are not taxable persons for stamp tax (because they do not appear as such in the law on the tax).

The Supreme Court concluded in this judgment that:

• It is true that article 35.4 of the General Taxation Law (LGT) allows entities without a separate legal personality to be liable for tax, in terms of “the laws that so determine” and that the transfer and stamp tax legislation does not expressly mention UTEs as taxable persons for the tax.
• However, there is no reason why “the law” referred to in article 35.4 of the General Taxation Law has to be the specific law on each tax.
• Law 19/1982, of May 26, 1982, on the tax regime for temporary groupings and joint ventures and companies for regional industrial development is a tax law. In article 9 (“liability to the tax authorities”), it states that the partners of UTEs are jointly and severally liable to the tax authorities in respect of any “indirect taxes that the joint entity is required to pay as a result of carrying on the activity they conduct”. This implies that any indirect taxes chargeable on the activities conducted by UTEs must be paid by the UTEs not by their partner companies.
• Moreover, the “acquirer” as used in article 29 of the Transfer and Stamp Tax Law (when defining the taxable person for the tax in relation to notarial documents) is a broad term that does not exclude per se entities without a separate legal personality, and the issue of ownership of the properties that is recorded in the notarial deed is not a determining factor for excluding UTEs as taxable persons.

Transfer and stamp tax

The transfer of shares in real estate developers or construction companies is exempt, even if their corporate purpose is broader (article 108 of the Securities Market Law in force until 2012)

Madrid High Court. Judgment of May 08, 2019

The former article 108 of the Securities Market Law (LMV) (in the wording before the 2012 reform) allowed an exemption from transfer and stamp tax for transfers of shares in companies. To be eligible for that exemption a number of requirements had to be met. In particular, transfers of shares in the capital stock of companies where more than 50% of their assets consisted of real estate, which placed the acquirer in a position of control over the company, were excluded from the exemption (and therefore were taxable).

Any real estate forming part of the current assets of companies whose sole corporate purpose consisted of carrying on business activities relating to construction or real estate development did not have to be included in their assets for the purposes of calculating that 50% threshold. In other words, transfers of shares in these companies were generally exempt from the tax.

This is precisely the element that was discussed by the tax authorities in the proceeding leading to this judgment. The tax authorities argued that a transfer of shares in a real estate development company was not exempt because the company's corporate purpose was not confined to the “construction or development of real estate” due to also including “banking intermediation services”.

Accordingly, they concluded that at least 50% of the company's assets consisted of real estate for the purposes of article 108 of the Securities Market Law and so it was not eligible for the exemption.

Madrid High Court, however, took the appellant’s view by applying the case law theory supporting that procedural requirements cannot condition the ability to claim a tax benefit, provided sufficient proof has been provided that in the specific case concerned the economic aim of the benefit is met. In the examined case, the fact of the company’s corporate purpose including two activities (“construction or development of real estate” and “banking intermediation services”) does not mean that it carried on both activities. If, as was proven, the company only carried on the first activity, it was eligible for the exemption in this case. 

Management procedure

The tax authorities cannot systematically impose obstacles on the taxpayer for procedural reasons to avoid recognizing entitlement to a refund of incorrect payments

Madrid High Court. Judgment of July 4, 2019

In the case examined in this judgment, the tax authorities had refused a refund of incorrect payments made by the taxpayer in respect of the tax on retail sales of certain oil and gas products, by arguing that the invoices produced to evidence the charged tax were incomplete.

In subsequent pleadings, the taxpayer provided evidence that the invoices showed that the tax was included in the price, in line with the parameters set out in the law. Despite this, the tax authorities again refused the refund for the same reason.

At the following instance (economic-administrative claim to Madrid Regional Economic-Administrative Tribunal), the appellant produced authorization from the tax authorities to issue the invoices with that information and the refund was refused a third time, for different procedural reasons.

In this judgment, Madrid High Court concluded that the tax authorities are creating, beyond acceptable limits, procedural obstacles, with the only aim of avoiding having to refund the incorrect payments to which the taxpayer is entitled, and for this reason it acknowledged the taxpayer’s entitlement to the refund.