Publications

Nonresident income tax

Nonresident funds are entitled to a refund of withholdings incurred indirectly

Central Economic-Administrative Tribunal. Decision of January 16, 2020

A Luxembourg investment fund incurred nonresident income tax (NRIT) withholdings on dividends from its investments in Spanish shares. Due to considering the amount of the withholdings made exceeded the amount owed, it requested a refund of the excess from the tax authorities by filing the relevant forms 210. The tax authorities denied the refund because the certificates produced by the Spanish depositary did not identify the claimant as the beneficiary.

In the subsequent claim, the fund contended that the investment had been channeled through an international investment structure in which various custodian banks participated (specifically, between the fund and the payer of the dividends there were two Luxembourg banks and a Spanish one) and that the investment was made through an omnibus account owned by the fund itself. To support this claim, the claimant produced the withholding certificates issued by the three banks that formed part of the chain of custody. These certificates showed that the dividend paid by the Spanish entities was ultimately meant for the fund, as follows:

1. In the certificates issued by the Spanish bank, the first Luxembourg bank appeared as beneficiary,
2. in those of the first Luxembourg bank, the second Luxembourg bank appeared, and
3. lastly, in the certificates of the second Luxembourg bank, the investment fund-claimant appeared as owner of the income.

The Central Economic-Administrative Tribunal (TEAC) concluded that, in cases of international structures such as the one described, it cannot be required for the withholding certificate issued by the entity that pays over the withholdings (the depositary, resident or represented in Spain) to identify the ultimate owner of the income (the investment fund). For that reason, TEAC allowed “ownership” of the withholdings to be substantiated by producing sufficient proof of the chain of custody/beneficiaries, which the taxpayer did in this case.

Lastly, TEAC noted that any potential withholding deficiencies, or failure to complete forms 216 and 296, by the Spanish withholding agent are that agent’s responsibility and cannot be claimed against the ultimate recipient of the dividend that incurs the withholding. In other words, those defects should not prevent the nonresident fund that incurred the withholdings from being able to request a refund of them.

 

Personal income tax

Capital gain with known origin is not an undisclosed capital gain, even though the reason for its receipt is not known

Central Economic-Administrative Tribunal. Decision of December 3, 2019

The tax authorities initiated an audit in relation to personal income tax which ended with several assessment and penalty decisions. In the assessment decisions, undisclosed capital gains were attributed in respect of the collection of certain bearer checks.

The Catalan Regional Economic-Administrative Tribunal confirmed the adjustment and partially voided the penalties. In the subsequent appeal, the taxpayer pleaded that undisclosed capital gains should not be attributed to him because he had evidenced the origin of the amounts received by cashing the checks. In particular, the companies where the funds originated had been identified (in his family circle).

In this context, TEAC determined the interpretation that an undisclosed capital gain cannot be attributed if the source of the disclosed capital is known, because the person or entity from where it originated is identified, and the only unknown element is the legal or economic reason for its receipt. In these cases, the auditors must characterize the received income, by reference to the particular circumstances, as employment income, income from the economic activity, capital gain, income earned as shareholder, etc., but they cannot conclude there has been an undisclosed gain.

Personal income tax

‘Tax’ capital loss occurring on a gift is deductible on giver’s personal income tax return

Valencia Regional Economic-Administrative Tribunal. Decision of September 30, 2019

A married couple gave away several buildings and included on their personal income tax returns both the capital gains and losses arising from those gifts.

The tax authorities eliminated the losses because, under article 33.5 of the Personal Income Tax Law, losses arising from transfers for no consideration by inter vivos acts or gratuities are not computed as capital losses. Moreover, the authorities’ adjustment was in line with interpretation of the Directorate General for Taxes as expressed in various binding resolutions.

Valencia TEAR, however, departed from the interpretation of the DGT, the State Tax Agency and its own in previous decisions by finding as follows:

1. On gifts, there can be two types of capital losses: an “economic capital loss” and a “tax capital loss”.
2. An “economic capital loss” is what necessarily arises as a result of the giver’s assets leaving without any others entering as consideration. There has never been any doubt in relation to this loss that it cannot be computed on the giver’s personal income tax loss.
3. A “tax capital loss” is the loss arising for the giver for personal income tax purposes due to the positive difference (as the case may be) between the cost value of the asset and its value for inheritance and gift tax purposes at the time of the gift. This loss, in the TEAR’s opinion, can be computed on the giver’s personal income tax return.

 

Real estate tax

Land of a school built on ground owned by municipal council is exempt from real estate tax

Madrid Municipal Economic-Administrative Tribunal. Decision of January 14, 2020

The law governing real estate tax (IBI) allows an exemption for real estate that is owned by the central government, or an autonomous community or local government authority, and is used directly for providing educational services, among others.

In the case examined in this decision, a municipal council had granted a surface right to an entity for the construction of a school. The Madrid Municipal Economic-Administrative Tribunal recognized, based on the Supreme Court’s view, that this real estate tax exemption could be claimed on the portion relating to the land belonging to the building, because it was not owned by the surface right holder but by the municipal council..

 

Administrative procedure

The tax authorities can make presumptions as long as there is a precise and direct link between the proven fact and the items of proof used

Central Economic-Administrative Tribunal. Decision of January 28, 2020

Due to the nonpayment of various tax debts, the tax authorities placed an attachment on the taxpayer’s shares in an entity. Moreover, it ordered that the entity (which was not the person subject to the attachment) could not dispose of its real estate assets. For that purpose, it applied a provision of law that allows a company to be prevented from transferring its real estate where (i) a taxpayer’s shares in the company have been attached, if (ii) the taxpayer has effective control over it.

Valencia TEAR concluded that this prohibition was not valid because the taxpayer’s effective control of the company had not been sufficiently proven and because the measure was not proportionate, in view of the difference between the estimated value of the attached shares and that of the real estate to which the prohibition on disposal applied.

The head of the Collection Department stated to TEAC that the attached taxpayer’s effective control had been correctly substantiated with prima facie evidence and that the adopted measure (prohibition on transfer) was not one of the injunctive remedies expressly specified in the law which are subject to the invoked principles (such as proportionality).

TEAC upheld the appeal and reached the following conclusions:

1. The use of prima facie evidence is valid where there is a direct and precise link between the evidence and the conclusion reached, according to rules of human judgment. In this specific case, the tax authorities had verified the debtor’s direct family relationship with the company’s other shareholders and that the debtor had been the director of the company (among other evidence); which means it may be concluded that effective control existed.
2. The adopted injunctive remedy is not specified in article 81 of the General Taxation Law and, therefore, the principle of proportionality between the estimated value of the attached shares and that of the real estate that is subject to the prohibition on disposal does not apply.  To refute that prohibition on disposal, it is only possible to contend, as a ground for objection, the absence of any of the factual circumstances that allow it to be applied, which do not include that principle of proportionality.

 

Management/refund procedure

Tax authorities must pay interest on interest not refunded within time limit

Valencia Regional Economic-Administrative Tribunal. Decision of April 11, 2019

At issue was whether the refund of late-payment interest by the tax authorities must be accompanied by the payment of late-payment interest calculated on that interest.

Based on the Supreme Court's recent case law, Valencia TEAR concluded that in the same way as the taxpayer has to pay late-payment interest on debts owed to the tax authorities (although these debts already include late-payment interest), the tax authorities must be subject to the same type of obligation. Otherwise, there would be a breach of the principles of (i) equality of parties in the legal/tax relationship, (ii) prohibition of unjust enrichment, and (iii) indemnity or restitutio in integrum.

In short, the tribunal recalled that late-payment interest payable to the taxpayer is a tax debt, so when this debt is net, due and payable, a delay in payment generates interest (interest on interest).

 

Audit procedure

Tax authorities cannot start a new audit on a previously audited issue if no new facts or circumstances have first been discovered

Central Economic-Administrative Tribunal. Decision of December 3, 2019

The management bodies carried out a limited audit in relation to the tax credit for reinvestment of extraordinary income claimed by a corporate income taxpayer. That audit ended without a reassessment. Subsequently, the audit authorities initiated a tax examination and investigation procedure in relation to the same issue, that is, limited to reviewing the reinvestment tax credits. That procedure ended with an assessment decision in which the tax credit was questioned, by arguing that the assets in which the reinvestment had been made did not qualify. Moreover, the taxpayer’s conduct was deemed to constitute a tax infringement.

Against that, the taxpayer contended that the limited audit had a preclusive effect which prevented the tax authorities from reassessing, in a subsequent audit, the matter that had already been audited.

TEAC found in favor of the taxpayer and clarified the following:

1. The alleged preclusive effect is excluded in cases where new facts or circumstances appear which justify a new reassessment.
2. However (as the National Appellate Court held in a judgment of October 24, 2013 - appeal no. 274/2010), the new facts or circumstances that authorize the tax authorities to initiate a new tax procedure on a matter that has already been audited must be facts or circumstances that have appeared subsequently and significantly alter the status quo in relation to which the limited audit was carried out. And they must be facts and circumstances that have come to the tax authorities’ knowledge before the commencement of the second procedure.
           
   In other words, facts or circumstances that the tax authorities discover for the first time in the course of the second procedure, due to having made a greater effort or a more detailed investigation than in the first procedure, do not justify a new review.

 

Penalty procedure

The penalty for not reporting an unjustified gain on a personal income tax return cannot be justified by the mere failure to file form 720

Central Economic-Administrative Tribunal. Decision of November 22, 2019

An individual did not file the information return on assets and rights abroad (form 720), nor did he report the income obtained from those assets on his personal income tax return. As part of an audit, an assessment decision was rendered in respect of personal income tax in which:

1. The savings component of taxable income for personal income tax purposes was increased by the income from movable capital obtained from accounts held abroad and by the capital gains and losses obtained from the transfer of securities deposited in foreign financial institutions.
2. In addition, an undisclosed capital gain was attributed for the value of the assets not reported on form 720, under article 39.2 of the Personal Income Tax Law.

As a result of the reassessment, three penalties were imposed for the commission of three tax infringements: (i) penalty for failure to pay over personal income tax in relation to unreported income from movable capital and capital gains, (ii) penalty for failure to file form 720, and (iii) penalty for failure to pay over tax on the undisclosed capital gain relating to the value of the assets abroad not reported voluntarily on form 720.

This last penalty is that specified in additional provision 1 of Law 7/2012, establishing a penalty amounting to 150% of the tax liability determined under that article 39.2 of the Personal Income Tax Law.

TEAC confirmed the first two penalties, but held the third one null and void, on the ground that the analysis of culpability is incomplete and cannot be completed in the review procedure. In this regard, it affirmed that:

1. In order to impose a penalty, there must be an act or omission specified in the law (objective element). In this case, this requirement is met because form 720 was not filed.
2. But there must also be the intentional element, meaning, culpability.
3. This culpability cannot be based on the mere failure to file form 720, because this conduct triggers another separate penalty.
4. Nor is it sufficient to refer to the conduct that led to the existence, in statute-barred years, of concealed income, given that those fiscal years and those infringements are not being reassessed.
5. Analysis of culpability must be based on an investigation into how the different circumstances pleaded by the claimant might have affected his conduct, leading him not to report the income. Specifically, the claimant stated that his assets came from an inheritance received in a statute-barred fiscal year and, therefore, he was convinced that it was not legally possible for an undisclosed capital gain to be found to exist for personal income tax purposes as a result of owning those assets. Because the auditors did not analyze in what way that conviction may be deemed culpable, the penalty is inappropriate.

 

Review procedure

Claims referring to different taxes can be joined if jurisdiction to decide them is not altered

Central Economic-Administrative Tribunal. Decision of October 8, 2019

The TEAR joined various economic-administrative claims filed by several interested parties against different assessments and penalties relating to different fiscal years and taxes (personal income tax, VAT, corporate income tax) and delivered a judgment setting them aside, which was appealed to TEAC.

In the appeal, TEAC noted that the joining of claims decided by the Catalan TEAR had caused an alteration of the jurisdiction of the tribunals called upon to hear some of the assessments and penalties. Specifically, because the joining of claims meant that the amount of the joined claim was that of the appealed administrative decision on the highest amount, the joined sum exceeded 150,000 euros, which gave them access to TEAC. However, if the joining of claims had not been permitted, some of the contested assessments and penalties would not have exceeded that amount, which would have determined the jurisdiction of the TEAR and an inability to appeal those claims to TEAC.

In view of these circumstances, TEAC analyzed the cases in relation to the joining of economic-administrative claims specified in article 230 of the General Taxation Law, and concluded as follows:

1. In cases of claims by more than one interested party relating to the same tax which come from the same procedure (paragraph b) of article 230.1 LGT), or of claims affecting the same or different taxes and there is a connection among them (article 230.2 LGT), the joining cannot alter the jurisdiction for deciding the claim, or the applicable challenge procedure.
2. In the other cases related to joining claims, this restriction is not expressly specified, so the joining can determine a change in the jurisdiction to decide the claim and in the applicable challenge procedure. Those are, specifically, claims filed (i) by the same interested party in relation to the same tax, deriving from the same proceeding, (ii) by several interested parties against the same administrative decision, and (iii) against a penalty if a claim had been filed against the tax debt from which it derives. These cases are those established in letters a), c) and d) of article 230.1 of the General Taxation Law.

In the examined case, the joining of claims could only be done under article 230.2 of the General Taxation Law, and therefore, the decision to join them was not lawful given that it altered the jurisdiction to decide the claim in the economic-administrative procedure without authorization by law.

For that reason, TEAC set aside the contested decision and ordered the proceedings to be rolled back to allow the Catalan TEAR to deliver the relevant decisions specifying only the joining of the claims referring to the same tax and their relevant penalties and offering the “challenge footnote” that is appropriate in each case.