Tax Newsletter - May 2023

Deferred tax assets associated with internal provisions covering commitments in respect of retirees or workers in pre-retirement can be monetized

According to the Supreme Court, the law does not require pension commitments to be outsourced, but instead simply to be designed and serve the purpose of improving upon the benefits available to workers under the social security system. Furthermore, it confirms that this right to monetize is not limited to pension commitments and is also applicable in pre-retirement situations.

A spouse who has left the domicile owing to a separation, divorce or annulment of the marriage can apply the exemption for reinvestment in a principal residence

According to the Supreme Court, a taxpayer who has abandoned their principal residence due to a separation, divorce or the annulment of their marriage, may apply the personal income tax exemption for reinvestment when the residence is transferred, provided the other spouse fulfills meets the effective occupancy requirement at the time of the transaction or on any day within the preceding two years.

The tax on economic activities charge must be reduced for the period in which businesses were required to shut down due to the state of emergency

The Supreme Court has concluded that the shutdown of operations derived from the state of emergency during the pandemic did not determine non-existence of the taxable event for the purposes of the tax on economic activities, because when it started the tax had already become chargeable. However, businesses are entitled to have the tax charge reduced proportionally in respect of the time they were unable to operate, as long as they shut down completely.

The calculation of financial loss in the scaling of penalties should be based on net tax payable rather than final tax payable

The Supreme Court has confirmed that the financial loss to be considered in relation to the scaling of tax penalties must be calculated by reference to the proportion between the penalty base and net tax payable (rather than final tax payable), i.e. by adding, in the denominator, the withholdings, prepayments and installment payments made during the year.

Self-assessments based on a principle established by a TEAR are not covered by the principle of legitimate expectation

TEAC has issued a new decision affirming that the doctrine established in its decisions in relation to points of law are binding upon the bodies responsible for the application of taxes in relation, also, to past situations which have not become statute-barred, where the principle of legitimate expectation does not apply. There is no legitimate expectation where the taxpayer has relied on a decision of a regional economic-administrative court (particularly if the DGT had issued binding resolutions to the contrary).

Further limits are placed on the deduction of finance costs for corporate income tax purposes; and changes are made to the system of reductions for personal income tax purposes for income from the leasing of residential properties

Laws 13/2023 and 12/2023 of May 24, 2023, published in the Official State Gazette on May 25, 2023, have made some important changes affecting personal income tax, corporate income tax, VAT and the General Taxation Law, among others. Of particular note is the introduction of a new limitation affecting the general rule on the deduction of finance costs for corporate income tax purposes, as a result of which the operating income on which the deductible amount is calculated will not include expenses, income or revenues that have not been included in the tax base (for example, dividends and gains on sales of shares). In addition, in relation to personal income tax, and due to the approval of the Housing Law, the system of reductions applicable in the calculation of net revenues obtained from the leasing of residential properties has been substantially modified, leaving the general reduction at 50% (it was previously 60%) for agreements entered into after the entry into force of the law (which, for these purposes, is January 1, 2024).

For further details on this month’s judgments, decisions, resolutions and legislation, SEE THE WHOLE NEWSLETTER HERE.