Tax Newsletter - June 2020 | DGT resolutions
Tax Newsletter - June 2020 | DGT resolutions
Corporate income tax.- The DGT reiterates acceptability of non-monetary contributions of shares that allow the “tax fee” on the distribution of dividends to be eliminated
Directorate General for Taxes. Resolutions V1007-20 of April 22, 2020 and V1122-20 of April 28, 2020
In these two resolutions the DGT examined non-monetary contributions of shares by individuals. In both cases the individuals, who shared ownership of shares in company A, contributed those shares in A to two holding companies (B and C) each wholly owned by one of them.
The DGT found that the reasons provided for the contributions were valid and that therefore it was eligible for the neutrality regime. Among the reasons mentioned were:
a) Allowing the equity of the two businesses to be planned and managed separately.
b) Facilitating the handover to the next generation.
c) Enhancing the obtaining of funding for new investments.
d) Funneling through the holding companies the dividends distributed by their investees (in other words, avoiding the “tax fee” arising from distributing those dividends to individuals so as later to make investments).
Corporate income tax.– Tax losses are not reduced by impairment losses on the investment, if the impairment losses are reverted before the merger
Directorate General for Taxes. Resolution V0853-20 of April 14, 2020
The Corporate Income Tax Law states that, in transactions for which the neutrality regime has been elected, the tax loss carryforwards generated by the transferring company have to be transferred to the transferee. However:
a) If the transferee held an ownership interest in the transferor or both belonged to a group for corporate law purposes, the tax loss carryforwards had to be reduced by an amount equal to the positive difference between the value of shareholder contributions, of any type, related to the ownership interest and their tax value.
b) Additionally, under transitional provision sixteen of the law, any tax loss carryforwards of the transferring company that gave rise to impairment of the ownership interest in the transferee company (or in another company in the group for corporate law purposes) cannot be offset before January 1, 2013.
The issue submitted for resolution concerned a merger by absorption in which a parent company of a group would absorb a wholly owned company, which had tax loss carryforwards. After underlining that the fact of the absorbed company having tax loss carryforwards does not per se invalidate the ability to claim the special tax regime, the DGT examined the requirements for the absorbing company to acquire the right to offset the tax losses of the absorbed company and pointed out the following:
- The aim of the limit related to the impairment losses on the investment is to prevent the same loss being used twice; which, if an impairment allowance has been recorded, would occur if the absorbing company has deducted those impairment losses and moreover is allowed to offset the tax losses generated by the absorbed company.
- However, if before the transaction the impairment losses on the ownership interest recorded and deducted by the absorbing company is reverted, the tax loss carryforwards do not have to be reduced in respect of those impairment losses.
Corporate income tax.- A nonproportional full spinoff following a merger by absorption cannot benefit from the neutrality regime
Directorate General for Taxes. Resolution V0857-20 of April 14, 2020
Two brothers holding different ownership interests in two companies (A and B) engaged in real estate operations, intended to separate gradually the capital owned by each. They planned to carry out a merger in which A would absorb B. The post-merger company would later perform a spinoff resulting in two companies C and D; the brothers would each receive ownership of one of these companies. The assets to be received by C and D did not form lines of business.
The DGT denied eligibility for the neutrality regime because the shareholders of the company performing the spinoff (the post-merger company) would receive shares in the beneficiary companies of the spin-off in different proportions to the interests they held in the post-merger company, which determines that the transaction would qualify as a nonproportional full spinoff; added to which, the transferred assets and liabilities did not amount to lines of business.
Corporate income tax.– If the merger reserve relates to the capital and additional paid-in capital contributed by the shareholder to the absorbed company, their distribution does not have to be included in the recipient’s tax base
Directorate General for Taxes. Resolution V0535-20 of March 5, 2020
Company H set up company P, which in turn acquired the whole of company A. In a downstream merger for which the neutrality regime was elected, company A absorbed company P. As a result of that transaction, a merger reserve emerged at A relating to the capital and additional paid-in capital of P (contributed by H for P to acquire its interest in A). Now company A is going to distribute that merger reserve to company H.
The principle of subrogation in respect of rights and obligations prevails in the tax neutrality regime, and among them the retaining of the tax regime applicable to the capital and additional paid-in capital existing at the absorbed company, regardless of how they are included in the equity of the absorbing company. Therefore, any capital or additional paid-in capital existing at company P (absorbed company) which were later repaid to shareholder H, would retain their tax regime, regardless of whether they had been included in the accounting records of company A (absorbing company) as reserves. In other words, they would treated in the same way as a repayment of capital or additional paid-in capital.
A repayment of capital or additional paid-in capital (article 17.6 of the Corporate Income Tax Law) requires the shareholders to include in their tax bases the amount by which the market value of the received elements exceeds the tax value of their interests.
In the examined case, the tax value of H’s interest in A would be determined by reference to the provisions in article 81.2 of the law on the tax (neutrality regime); in other words, the value for tax purposes of that interest would be the tax value that it had at P.
Therefore, if the merger reserve being distributed relates to the capital and additional paid-in capital contributed by H to company P, company H does not have to include any income in its tax base as a result of the distribution.
Corporate income tax.- The finance cost for distributing additional paid-in capital is deductible within the general limits for finance costs
Directorate General for Taxes. Resolution V1193-20 of April 30, 2020
A company received a loan from a related company and used it in part to repay additional paid-in capital to its sole shareholder. The issue concerned whether the finance cost in respect of that loan would be deductible.
To resolve the issue, the DGT started out from the premise that, since the acquisition or formation of the company by its sole shareholder, it has generated income higher than the additional paid-in capital being distributed, and as a result, under accounting standards, that distribution may be characterized as a distribution of income.
It concluded from that premise that finance costs are deductible if they satisfy the general requirements for the deduction of finance costs under article 16 of the law.
Personal income tax.- A director may deduct self-employed worker contributions, even if he is not paid for his services
Directorate General for Taxes. Resolution V0718-20 of April 6, 2020
The requesting party is a director of a limited liability company and is not paid for his services. The company has not had any income. The requesting party has not participated as a self-employed worker in the performance of any economic activity, but has paid social security contributions under the self-employed workers program.
The DGT specified that the contributions to the self-employed workers program that the requesting party was required to make for the performance of his functions as director has to be treated as a deductible expense for him when determining his net salary income, which may be a negative amount for this reason.
It is relevant to recall that Madrid High Court, in a judgment delivered on October 14, 2019, adopted the opposite view by arguing that if a director is not paid for his services social security contributions cannot be deducted.
Personal income tax.- Inbound expatriates can benefit from the rules allowing exempt or non-taxable salary income (flexible compensation)
Directorate General for Taxes. Resolution V0589-20 of March 16, 2020
The DGT examined the case of a company hiring employees electing the special regime for workers sent from other countries (inbound expatriates). These workers receive various types of income in kind. Under the special regime for inbound expatriates, the tax debt has to be determined under the rules provided in the revised Nonresident Income Tax Law, with certain specific provisions. This reference to the Nonresident Income Tax Law contains an embedded reference to the rules in the Personal Income Tax Law, made in article 13.3 of the Nonresident Income Tax Law. Among the mentioned specific provisions, it is determined that inbound expatriates cannot claim exemptions.
The issue submitted for resolution concerned whether inbound expatriates can benefit from the exemptions that the Personal Income Tax Law allows for certain types of income in kind.
The DGT recalled that the distinction between cases of exempt and nontaxable income that has existed since January 1, 2015 in the Personal Income Tax Law is for clarification and cannot imply that the exemptions under article 42 of the Personal Income Tax Law give rise to salary income that is taxable for inbound expatriates. In short, anyone who has elected the inbound expatriates regime may benefit from the exemptions allowed in the Personal Income Tax Law for income in kind.
Personal income tax.- The indemnity received by a false self-employed worker, as agreed in a judicial conciliation hearing, is not tax-exempt if unjustified dismissal is not suitably acknowledged
Directorate General for Taxes. Resolution V0777-20 of April 7, 2020
The requesting party was dismissed by the company where she worked as a false self-employed worker, so she decided to sue the company. A judicial conciliation agreement was reached between both parties in which, without entering into considering the legal characterization of the dismissal, the claimant was granted an amount of indemnity.
The DGT provided the following interpretation:
a) Because the proceeding conducted by the labor court starts out from the premise that the requesting party had an employer/employee relationship, the indemnity has to be characterized as salary income.
b) It is only exempt, however, if unjustified dismissal is acknowledged, either before the conciliation service, or through a court decision.
c) In this case the exemption is not applicable because unjustified dismissal was not expressly acknowledged (although the 30% reduction may be applicable if the generation period is longer than two years).
Personal income tax.- Fees in respect of proceedings that took several years are multi-year income
Directorate General for Taxes. Resolution V0609-20 of March 30, 2020
The requesting party is a lawyer and occasionally receives fees in relation to court proceedings that lasted over a year, and charges a single amount at the end of those proceedings.
The DGT recalled that the reduction for multi-year income is not applicable to income obtained from carrying on an economic activity which regularly or ordinarily generates this type of income. It mentioned, however, that the Supreme Court clarified, in a judgment delivered on March 19, 2018, that to determine whether income is obtained regularly or ordinarily the starting point is an analysis of the specific activity carried on by each taxpayer. In that judgment, the court concluded (and this was taken on board by the DGT) as follows:
a) The regularity or ordinary receipt of the income which prevents the reduction from being claimed has to do with the professional whose tax position is involved and to the revenues obtained individually on his personal income tax return, not to the practice of the legal profession or the characteristics of that profession, considered as a whole or in abstract terms.
b) The revenues obtained by a lawyer for acting as defense counsel in a proceeding that lasted longer than two years, where they are received in one or more payments in the same period, are considered generated in a period longer than two years and may benefit from the treatment allowed for multi-year income.
c) The burden of proving that the factual requirements to claim the reduction are met lies with the tax authorities, who will have to face the unfavorable consequences of failing to provide evidence of them. That burden obviously involves justifying and supporting the reasons why the reduction is not applicable.
Personal income tax.– Within the scope of economic activities, the depreciation basis for premises received as a gift is their salable value, increased by the costs and taxes associated with the acquisition
Directorate General for Taxes. Resolution V0728-20 of April 6, 2020
The requesting party carries on a professional activity. The premises where it carries on its activity were received as a gift. The request concerned the acquisition value of the premises for the purposes of their depreciation.
The acquisition value (which has to match the carrying amount that must be taken to include the asset in the record book of capital goods) is the salable value of the premises when they were acquired, increased by the expenses and taxes associated with their acquisition. The salable value is the price that it is presumed a potential buyer would be prepared to pay by reference to the specific characteristics of the asset.
The value calculated as described above, excluding the value of the land, is the basis for depreciating the premises.
Personal income tax.- The two-year period for reinvestment in a new residence stopped running between March 14, 2020 and May 30, 2020
Directorate General for Taxes. Resolution V1115-20 of April 28, 2020
The gain on the sale of a taxpayer’s principal residence is exempt if the price obtained is invested in two years.
As we summarized in our alert dated June 5, 2020 (view here), the DGT took the view that the two-year period stopped running between March 14, 2020 and May 30, 2020.
Nonresident income tax.- An activity lasting under six months, which has recurred over several years, may give rise to the existence of a permanent establishment in Spain
Directorate General for Taxes. Resolution V1008-20 of April 22, 2020
The requesting party, a German national, is a lawyer tax resident in Germany. He owns premises in Lanzarote that have been fitted out for a café bar business and he intends to carry on that business personally (without employing any workers) during the vacation periods in Spain, which are not longer than two or three months in a year and are not continuous.
The OECD’s commentaries state that a permanent establishment exists where the activity in the place of business is not purely temporary, which is generally interpreted to require that the activity is carried on for longer than six months.
According to the DGT, however, even where the period in which the activity is carried on is shorter than six months, a permanent establishment may also exist if the activity is of a recurring nature over more than one year, which appears to take place in the case submitted for resolution, together with the fact that the activity is always carried on at the same premises. Additionally the café bar business will be carried on by the requesting party only in Spain (he will not carry on a similar business in his country of residence).
It has to be concluded therefore that a permanent establishment in Spain does indeed exist. In particular, the rules for determining the tax base provided for seasonal business activities must be applied.
Nonresident income tax.– Legal costs received by a UK resident are characterized as a capital gain which, under the tax treaty, is only taxable in the state of residence
Directorate General for Taxes. Resolution V1010-20 of April 22, 2020
The Nonresident Income Tax Law states that income must be characterized under the personal income tax rules with a few specific provisions. For this reason, broadly speaking, legal costs obtained by a nonresident (other than through a permanent establishment) have to be characterized as a taxable capital gain.
The DGT concluded, however, that, if the Spain-UK tax treaty is applicable, this gain is exempt in Spain (and only taxable, if applicable, in the UK).
It must be remembered that TEAC concluded that the capital gain must be determined by reducing the costs by the expenses incurred in the process, subject to the limit of their amount (view our alert here).
VAT.- Output VAT on advance payments for hotel bookings must be corrected if the customer fails to show
Directorate General for Taxes. Resolution V0839-20 of April 14, 2020
In this resolution the DGT examined whether amounts received by hotel establishments are subject to VAT if the booking is canceled or the customer fails to show, in a case where the hotel offers two alternatives:
a) Alternative 1: Pay a reduced price for the room and make an advance payment, which will is not refundable if the booking is canceled or the customer fails to show.
b) Alternative 2: Pay a price without a reduction for the room, and with no advance payment; if the customer fails to show or cancels the booking outside the time limit, the price of one night’s stay is charged to their credit card.
The DGT based its resolution of this issue on the criteria determined by the Court of Justice of the European Union in Case C-277/05, Société thermale d’Eugénie-les-Bains, and concluded as follows:
a) Alternative 1:
- The nonrefundable amounts that are paid in advance are prepayments towards the final service and therefore subject to VAT.
- If a cancellation occurs or the customer fails to show, the withheld amounts (the advance payment) are not consideration for an act of consumption, instead a type of indemnification not subject to VAT. Therefore, the VAT originally charged has to be refunded to the customer due to termination of the contract, by issuing a correcting invoice.
b) Alternative 2: The amounts charged for cancellation of the booking or because the customer failed to show do not relate to an act of consumption, instead to a payment whose aim is to remedy the consequences of failure to perform the contract (an item of indemnification). Therefore no transaction subject to VAT exists.
Tax on the value of electricity output.– Not chargeable on electricity generated for own use with the receipt of remuneration for surplus electricity
Directorate General for Taxes. Resolution V1187-20 of April 30, 2020
The requesting party was finalizing an investment agreement to acquire the status of owner and associated consumer at a plant generating electricity from renewable energy sources and will elect the option of generating electricity for own use receiving remuneration for surplus electricity.
Since under article 14.4 of Royal Decree 244/2019, consumers’ time-based surplus energy under the simplified remuneration system will not be treated as energy fed into the electricity system, the taxable event triggering the tax on the value of electricity output will not occur.