Tax Newsletter - January 2019 | Ruling requests
Tax Newsletter - January 2019 | Ruling requests
Corporate income tax
A change to the book value of shares does not have tax effects
Directorate General for Taxes. Ruling V2805-18, of October 25, 2018
A company acquired shares in a business reorganization for which the tax neutrality regime had been elected. Those shares were recognized for accounting purposes at their historical cost. The company considered that it should have recognized the shares for accounting purposes at their underlying carrying amount on acquisition.
The DGT did not characterize this change in the value of the shares as an accounting error but as a voluntary revaluation and recalled that, under the Chart of Accounts, assets cannot be revalued even if their market value is higher than their carrying amount.
Therefore, if the taxable person makes a voluntary revaluation of its assets, not protected by statute or regulation, this revaluation for accounting purposes will not have any effect on its corporate income tax.
Corporate income tax
The grant of a call option on a building is taxed according to the accounting treatment of the transaction
Directorate General for Taxes. Ruling V2749-18, of October 17, 2018
The shareholder of a dissolved company that was in the liquidation period offered a real estate company a call option on the net assets (a building) that the shareholder would be entitled to receive in that liquidation. The premium in respect of acquiring the option was to be part of the future purchase price; or else returned if the purchase did not ultimately take place.
The request concerned whether the receipt of the premium could be regarded as a taxable capital gain for the shareholder.
The DGT concluded that the tax treatment of the transaction is determined from its accounting treatment, because the Corporate Income Tax Law does not contain a specific regime for similar situations. Therefore, said the DGT, “there is no requirement to make any adjustment to book income for tax purposes in relation to the accounting entries needed for the sale of the call option that the requesting entity intends to execute”.
Personal income tax
Principal residence status ends if the property is rented out to tourists, even if for a few days
Directorate General for Taxes. Ruling V2768-18, of October 24, 2018
The requesting individual had a principal residence on which he was claiming the tax credit for investment in a residence, under the transitional rules allowing taxpayers to continue claiming that tax credit where the residence was acquired before 2013. In the summer, he rents out the residence as a tourist rental home.
This implies, according to the DGT, that the residence ceases to have principal residence status, and there will be no entitlement to the tax credit.
However, in the first year the residence is rented out as a tourist rental home the tax credit may be claimed for the number of days that elapsed until the first day of rental. Starting on that date, the right to the deduction is forfeited unless the residence starts being inhabited again uninterruptedly by the taxpayer (without renting it) for at least the following three years.
Personal income tax and tax on increase in urban land value
A “gift in payment” of the principal residence to a third party other than the mortgage creditor with the creditor’s consent is exempt
Directorate General for Taxes. Ruling V2646-18, of October 2, 2018
The personal income tax legislation and the legislation on the tax on increase in urban land value provide an exemption for transfers made by individuals in the form of a gift of the principal residence to discharge their debts secured with mortgages taken out with credit institutions.
The DGT considers that both exemptions are claimable even if the “gift in payment” is made to a third party, other than the mortgage creditor, provided it is this creditor that imposes that condition to agree to the gift in payment and accepts it as a means of discharging the obligation.
Inheritance and gift tax
Solar panels are characterized as real property
Directorate General for Taxes. Ruling V2880-18, of November 6, 2018
The requesting party, with tax domicile in Madrid, was to receive the gift of a solar panel, in a solar farm in Castilla-La Mancha.
The autonomous community government responsible for charging the tax will depend on whether the solar panel is characterized as an item of personal property (Madrid autonomous community) or real property (Castilla-La Mancha autonomous community).
The DGT, on the basis of its own previous interpretation (ruling of April 23, 2010) and that of the Supreme Court (judgment of May 30, 2007) in relation to other taxes, concluded that an asset consisting of a solar panel installed in a solar farm is characterized as an item of real property for inheritance and gift tax purposes. Consequently, by being located in a solar farm in Castilla-La Mancha, the government for this autonomous community will be responsible for charging the tax on the gift.
Inheritance and gift tax
Family business benefits are not available if the decedent or giver is not subject to wealth tax as a resident or non-resident taxpayer
Directorate General for Taxes. Ruling V2792-18, of October 24, 2018
The request concerned eligibility for family business benefits following the death of a Mexican resident who left his heirs an interest in a company resident in Mexico.
A wealth tax exemption is available for shares in companies, subject to certain requirements. If the exemption is available, the heirs are entitled to a reduction in their inheritance tax bill.
In the case described, the decedent did not have to report the shares for wealth tax purposes not even as a nonresident taxpayer because he was not resident in Spain and his assets (the shares in the Mexican company) were not located in Spain either. In other words, the reason for not reporting the shares in Spain for wealth tax purposes, was not because he claimed that exemption, but because he was not subject to the tax. He did, nevertheless, satisfy the requirements for the exemption. Among others, he owned more than 5% of the nonresident company and exercised management functions which accounted for most of his income.
Despite this, according to the DGT, because the decedent was not subject to Spanish wealth tax by reason of his ownership of the shares and of his residence, the inheritance tax reduction could not be claimed. This conclusion (which is questionable, especially since there were elements related to the taxable person or income in the European Union or the European Economic Area) is similar to that contained in Ruling V3238-17, of December 15, 2017, regarding the gift of shares in a family business resident in Finland, by a non-Spanish resident giver.
Inheritance and gift tax and tax on the increase in urban land value
Some specific comments on the taxation of a fiduciary heir and fideicommissaries
Directorate General for Taxes. Ruling V2791-18, of October 24, 2018
A mother with more than one child (one of which had been declared incapacitated by a court) appointed the incapacitated child fiduciary heir and the other siblings fideicommissary substitutes. The fideicommissary substitution was to come into effect after the death of the incapacitated brother subject to certain conditions.
The fiduciary arrangement involves, briefly, the fiduciary receiving all the assets with power of disposition. In other words, the fiduciary arrangement is equivalent to a usufruct arrangement, in that the fiduciary has the right to enjoy the assets (including with the power of disposition) in the fiduciary’s lifetime and the fideicommissaries (who act as bare owners) will only receive the assets that the fiduciary has not transferred at the time of the fiduciary’s death.
Therefore, in relation to corporate income tax:
- When the mother dies, the fiduciary heir is taxed in respect of absolute ownership of the assets in the inheritance, because he has the right to dispose of them without any conditions. At that time, the taxation of the fideicommissaries is put on hold.
- Later, when the fiduciary brother dies, it will be deemed that the fideicommissaries inherit all the assets of the first decedent (their mother). The assets must be reported at their value on the date of the fiduciary's death.
However, since the fiduciary was taxed in respect of his mother’s assets as if he had received them with absolute ownership, an application could be made for a refund of the tax paid by the fiduciary in respect of the assets he had not transferred (namely, in respect of the assets he really enjoyed as usufructuary not as the real owner).
The fideicommissaries are also required to report the assets they inherit directly from their fiduciary brother, and include the tax refund mentioned above in the remnant estate.
In relation to the tax on increase in urban land value:
- When the mother dies (first decedent), the fiduciary heir will be taxable person for the tax on increase in urban land value in respect of the transfer of ownership of the urban land as if he acquired absolute ownership of it.
- The taxation of the fideicomissaries (the other siblings) is put on hold until when the fiduciary dies. At that time, the fideicommissaries will be taxed if the ownership of urban land is transferred to all or some of them.
Attorneys-in-fact for the accounts of nonresident entities do not have to report them on Form 720 if they are disclosed in consolidated financial statements in Spain
Directorate General for Taxes. Ruling V2869-18, of November 5, 2018
A company resident in Spain has a number of subsidiaries in other countries that own bank accounts in other countries also. Several workers at the Spanish company, who are tax-resident in Spain, are attorneys-in-fact authorized to operate those accounts.
The legislation on Form 720 for reporting assets and rights located in other countries requires bank accounts in other countries to be reported by their holders and beneficial owners and by their representatives, beneficiaries, authorized representatives or anyone otherwise having power of disposition regarding the accounts.
However, the law contains an exemption from the obligation to report accounts in other countries where the holders are legal entities resident in Spain and the accounts are recorded in their financial statements, disclosed separately, and identified by their number, the credit institution and branch where they appear open, and country or territory in which they are located.
On the basis of that exemption, the DGT gave a flexible interpretation and took the view that the attorneys-in-fact for the foreign accounts of non-resident companies do not have to report those accounts if they are recognized in the consolidated financial statements or disclosed in the notes to the consolidated financial statements. This recognition must be construed broadly to be valid where the accounts are recorded in ancillary accounting documents provided they tally with the financial statements and give consistency to them; although from the information it must be possible to extract information on the accounts that is sufficient and free from any doubt.
This reasoning is wholly consistent with the interpretation given in rule V1861-13, on June 5, 2013.