Publications

Personal income tax

Reduction for renting home may be claimed on unreported income

Madrid High Court. Judgment of May 29, 2019

The Personal Income Tax Law allows a reduction to income obtained from renting a permanent residence to individuals under 30.

In the examined case, the landlord had not reported net income correctly. In a subsequent adjustment, the tax authorities failed to include the reduction in respect of renting a residence to the greater amount of income to be included in taxable income, because they considered that the reduction could only be claimed on income reported in the voluntary period.

Madrid High Court, however, allowed the reduction to be claimed on income not reported by taxpayers and later adjusted by the tax authorities.

VAT

Advertising services are used in Spain if it from there that the advertising material is broadcast

Supreme Court. Judgments of December 16 and December 17 2019

The general place of supply rule is where the customer belongs, so if the customer is not established in the VAT area, the transaction is not subject to VAT.

The law contains a “closing rule”, however, determining that some services that are not supplied in the European Union under that general rule are regarded as being supplied in the VAT area if their effective use or enjoyment takes place in that area.

These two judgments each examined cases involving entities established in the VAT area that provided advertising, consulting and marketing services to Gibraltar companies conducting online gaming businesses. Under the general place of supply rule, these services are not regarded as being supplied in the VAT area, or in the European Union either, but the tax authorities found that the “closing rule” applied in relation to effective use of the services.

The entities argued that their services should not be subject to VAT in Spain (or at least not in full). Their reasoning was that:

1. The Gibraltar companies conducted their businesses with players who could be anywhere in the world and the global sports sponsorship agreements were concluded to strengthen the brand internationally and promote their services among players everywhere.
2. Therefore, the advertising, consulting and marketing services could only be regarded as being used in Spain (at the most) in the proportion that the annual revenues obtained by the Gibraltar companies from players resident in Spain bear to their total revenues.

The Supreme Court found in favor of the authorities’ interpretation, however, because, from the evidence produced, it appears that the advertising, marketing and consulting services were confined to the Spanish market. It recalled in relation to this case the interpretation guidelines contained in the CJEU’s judgment in the Athesia Druck Srl case (C-1/08), under which effective enjoyment is regarded as occurring in the place from which the advertising material is broadcast.

The Supreme Court pointed out that partial application of the measure is not explicitly recognized by the directive and added that, in any event, in the examined case there was no room for partial application because, as mentioned, the services provided by the company itself were confined to the Spanish market.

It also pointed out that, if a distribution rule were allowed, there would only be room for it if the percentage attributable to Spain were not measured by reference to the total revenues of the Gibraltar company that was the recipient of the advertising services, instead by reference to the effective use of the specific services supplied by the Spanish company, which did not occur in this case. This effective use would be measured by reference to the percentage of players attracted in Spain as a result of the advertising activities, compared with the percentage of players attracted globally, as a result of those same activities.

Tax on increase in urban land value

Enforced collection of an assessment that is null and void as a matter of law may be appealed even though the assessment has become final

Pontevedra Judicial Review Court no 1. Judgment of October 15, 2019

Enforced collection was ordered in relation to a final assessment of the tax on increase in urban land value. The taxable person challenged the order initiating enforced collection proceedings by arguing that the assessment was null and void as a matter of law because no increase in the value of the building had taken place between the dates of its purchase and sale (which was proven during the proceeding). This ground for challenge does not appear among those defined in the law for appealing against orders initiating enforced collection proceedings.

Pontevedra Judicial Review Court no 1 upheld the appeal and concluded that the fact of the assessment being null and void as a matter of law means that the order initiating enforced collection proceedings may be appealed on grounds other than those expressly defined in the law. Since that null and void status had been proven, precisely because it has been substantiated that there had been no increase in value of the land, the tax does not have to be paid and therefore the enforced collection surcharge in respect of failure to pay that tax does not have to be paid either.

Tax proceedings

The tax authorities must serve reasonable notice of decisions that are to be enforced

Supreme Court. Judgment of December 18, 2019

Under article 150.5 of the General Taxation Law, where an economic-administrative decision orders audit work to be rolled back, the new audit work must end in the length of time remaining from the point to which the work was rolled back until the end of the maximum audit period, subject to a lower limit of six months.

In the case examined in this judgment, the Central Economic-Administrative Tribunal (TEAC) had settled an administrative appeal that set aside a decision by the Regional Economic-Administrative Tribunal (TEAR) for Valencia and ordered the audit work to be rolled back. Although the decision was notified to the interested parties in the administrative appeal (the taxpayer and the director of the audit department) with only one day's difference, shortly after the decision was issued, the TEAR for Valencia failed to forward it for enforcement to the director of AEAT’s audit department until almost seven months later. That director then declared that he did not have jurisdiction, so the TEAR had to forward the decision to the body with jurisdiction for its enforcement (the regional audit suboffice), which enforced the ruling a month later.

So, by reference to the date when the decision was originally notified to the taxpayer and to the director of the audit department, that six month period was not met, which was the applicable term in this case.

The taxpayer considered that, after that six month period had run, they had exceeded the maximum length of the audit and the right to make an assessment had expired; and therefore argued that the calculation of the six month period cannot depend arbitrarily on whether the authorities fail in their duties of good governance and give late notice of the decisions to be enforced.

In this judgment, the Supreme Court concluded that:

1. The principle of good governance must prevail in the authorities’ actions.
2. Various rights emanate from this principle for citizens, notably their rights to effective stewardship by government authorities and to the obtaining of an administrative decision within a reasonable period.

It nevertheless did not uphold the appellant’s arguments, because after examining the particular circumstances of the case it concluded that there had not been an unreasonable and disproportionate delay in forwarding the case file, because the TEAR had been diligent about sending the decision to the competent body after the first recipient had declared it did not have jurisdiction, and besides, no intent was found in the delay, beyond a simple error the first time it was forwarded.

Audit procedure

Auditors are allowed to review statute-barred transactions to conclude on their effects in non-statute barred periods before amendment of General Taxation Law

National Appellate Court. Judgment of October 23, 2019

In a tax audit an adjustment was made to the amortization of an amount of goodwill that had arisen in a merger performed in a statute-barred year (2006) when the new wording of the General Taxation Law introduced by Law 34/2015, of September 21, 2015 had not come into force. The appellant argued that the adjustment was incorrect because the authorities did not then have the power to examine a merger carried out in a statute-barred year to adjust the assessment for a non-statute barred year.

The National Appellate Court concluded in its judgment, referring to the Supreme Court’s case law (among others, in its judgment of February 5, 2015 in cassation appeal 4075/2013), that the auditors did have that power (at least, following the 2003 reform of the General Taxation Law, which came into force on July 1, 2014).

Interestingly the judgment had one dissenting vote cast by senior judge Jesús María Calderón, who considered that this interpretation was not consistent with the law for periods before the entry into force of that amendment of the General Taxation Law. The senior judge concluded that the tax law before that amendment only stated that the taxpayer had to prove the existence of tax losses generated in prior years by showing the relevant accounting records and supporting documents, and this mandate directed at the person with tax obligations did not allow the authorities to examine the legal transaction that gave rise to those entries let alone the legal correctness of that transaction.