Tax Newsletter - September 2020 | Decisions

Spain - 

Corporate income tax.- Directors’ compensation that goes against corporate law does not qualify for deduction

Central Economic-Administrative Tribunal Decision of July 17, 2020

Under article 15.e) of the current Corporate Income Tax Law (Law 27/2014 of November 27, 2014), compensation paid to directors for the performance of senior management functions or other functions deriving from an employment contract with the entity is not classed as a gratuity. The understanding had been, based on this article, that the new Corporate Income Tax Law had brought to an end the long-running dispute regarding the deductibility of remuneration of this nature.

In this decision, however, the Central Economic-Administrative Tribunal insists that the corporate law requirements must be met for such compensation to qualify for deduction. Therefore, in a case where the bylaws provide that the directors are not compensated for their services, the compensation paid to the director is not deductible. This conclusion is applicable both to listed and unlisted companies.

This compensation, under the principle of the binding relationship, could include any compensation received for the performance of executive and management functions by persons forming part of the managing body.


Corporate income tax.- Withholding tax made on unpaid rents  cannot be deducted

Central Economic-Administrative Tribunal Decision of June 29, 2020

A few regional economic-administrative tribunals have held that withholding tax due on payable income may be treated as if it had actually been paid, and may be deducted and refunded (if it is higher than the amount of tax payable). Others, however, have taken the opposite view, by arguing that in these cases no actual withholding has taken place.

TEAC concluded that the obligation to withhold is triggered, in relation to corporate income tax, when the income from which the tax is to be withheld becomes payable. The withholding of tax is necessarily associated with payment, however, so for the withheld tax to be deducted (and, if applicable, any amounts refunded), it is not enough for the obligation to have been triggered, it is also necessary for the tax to have been able to be withheld due to payment of the income.


Corporate Income Tax.- If a company declares itself bankrupt and is removed from the Companies Index, the procedure must contain essential documents relative to the declaration of bankruptcy

Central Economic-Administrative Tribunal Decision of June 11, 2020

The authorities declared a company bankrupt and, as a result, gave notice that it would be removed from the Companies Index.

TEAC observed that in the removal procedure sufficient information had not been made available on the debts or the enforcement actions taken for the declaration of bankruptcy. Because that state of bankruptcy must be actual rather than apparent to allow the corporate income tax legislation to be applied and decide on removal from the Companies Index, the removal decision was null and void due to the absence of reasoning.


Personal income tax.- The penalty for failing to report residential rental income must be calculated by reference to the reduction applicable to that rent

Andalusian Regional Economic-Administrative Tribunal. Decision of October 25, 2019

In the examined facts, the taxpayer had not reported in their personal income tax returns income from the rental of a residential property, due to considering that it could benefit from the 100% reduction allowed for cases where the renter is aged between 18 and 35. However, it did not have the notification from the renter stating that this was the case. The auditors adjusted the taxpayer’s position without applying any reduction. On the resulting debt, they calculated and imposed a penalty for failure to pay the required tax debt (article 191 LGT).

The Andalusian TEAR confirmed the assessment, but rendered the penalty void. The tribunal found that the infringement under article 191 LGT consists of failing to pay the tax debt that should have resulted from correct self-assessment of the tax. Because the taxpayer did not have that notification from the renter, they were not entitled to the 100% reduction, but they were entitled to the standard 60% reduction for residential rentals. The penalty, therefore, should have been calculated on the amount that should have been paid over if this 60% reduction had been made.

It needs to be mentioned that a decision by the Supreme Court is expected on a cassation appeal (decision of July 18, 2019, in appeal 1434/2019) in which the court will examine the meaning and scope of the expression “income reported by the taxpayer” as contained in article 23.2 of the Personal Income Tax Law for the purpose of applying the 60% reduction.


Value added tax.- If amounts of VAT for offset were generated in a year held statute-barred, their offset cannot be denied in a later year

Central Economic-Administrative Tribunal Decision of June 9, 2020

The company had amounts of VAT to be carried forward for offset. In separate audits, the authorities (i) reviewed the year in which those amounts of VAT to be carried forward had been generated, and found that they were not correct; and (ii) revised the subsequent year in which those amounts had been offset and, on the basis of the previous adjustment, disallowed the right to offset them. The adjustment made in the first audit, however, was voided due to becoming statute-barred.

TEAC held that, following the entry into force of Law 34/2015, of September 21, 2015, partially amending the LGT (in force since October 12, 2015), the authorities may audit amounts carried forward for offset from statute-barred periods, to adjust later non-statute barred periods. This option cannot apply, however, in cases where the adjustment for the period to which the amount for offset relates has been voided by a reviewing body due to being statute-barred, in view of the disappearance from the scope of the law of the voided assessments.


Value added tax.- Revenues obtained by purchasing derivative hedging instruments are not added to denominator for deductible proportion

Central Economic-Administrative Tribunal Decision of June 9, 2020 (reiterated principle)

The auditors changed the denominator in the fraction used to calculate an entity’s deductible proportion, because it had not included amounts relating to the income actually assessed on certain financial transactions; mainly, cash currency exchanges and forward exchange contracts, interest rate swaps and cross currency swaps.

In line with the supreme court judgments of May 18, 2020, TEAC concluded that these cannot be treated as transactions for VAT purposes. By purchasing those financial products, the entity simply hedges certain risks that could threaten the success of its specific activities. In other words, it is the financial institution offering those products that provides services in relation to them. Any revenues from the financial derivatives, therefore, do not have to be included for calculating the deductible proportion.


Value added tax.- Taxable amount cannot be changed if collection of the debt has been requested in a mailed document certified by a notary

Central Economic-Administrative Tribunal Decision of June 03, 2020 (reiterated principle)

Under article 80.4 of the VAT Law, the taxable amount may be reduced where the debts relating to amounts levied on chargeable transactions are fully or partially uncollectible. For these purposes, the taxable person is required to have requested collection of the debt through a court claim or demand for payment sent through a notary.

In the case examined by TEAC, the creditor had requested collection of the debt in a mailed document certified by a notary, so they were denied the option of changing the taxable amount. The TEAC held as follows:

  1. Mailed documents certified by a notary only evidence that the document was sent, the contents of the document and the date of delivery or sending through a technical procedure, but do not confer the right to reply on the same document. 
  2. The purpose of demand for payment documents, however, is to convey information or a decision to a person, inviting the recipient of the demand to adopt a certain type of behavior. These letters are sent by appearing before a notary in the place where the notice is sent (or by mail, if there is no legal rule against it) and contain a note stating the attempt to serve the petition through a notary, the means used and its result, in addition to the recipient’s reply.

The tribunal underlined also that the requirement relating to collection having to be requested through a court claim or demand for payment sent through a notary does not infringe the principle of neutrality of the tax, in that it contributes to ensuring exact receipt of VAT, to preventing fraud and to eliminating the risk of loss of tax revenue.


Penalty procedure.- Penalties for not paying a personal income tax debt must be calculated by taking into account the withholding tax sought from the payer

Central Economic-Administrative Tribunal Decision of June 11, 2020

The tax authorities considered that payments made by a club to the agent of one of its players were salary income for the player himself. The assessment issued to the club required payment of the tax not withheld. These withholdings were deducted in the assessment decision issued later to the player, so the amount due on this assessment was zero. In the penalty imposed on the player, however, the base for calculating the penalty was the amount of tax due, before deducting withholding tax. 

TEAC recalled that in an infringement consisting of “failing to pay”, the base for calculating the penalty matches the unpaid amount on the self-assessment as the result of commission of the infringement (article 191.1 LGT). Article 8.1 of the General Regulations on the Tax Penalty Regime, however, states that, if all adjustments made by the auditors are subject to a penalty (as occurred in the disputed case), the base for calculating the penalty is equal to the amount due as a result of adjustment made.

Therefore, it rendered void the challenged penalty decision, by finding that, if the omitted withholdings are sought from the withholding agent in a earlier procedure (and, therefore, in the personal income tax audit adjustment procedure on the recipient their deduction was allowed), the base for calculating the penalty must match the amount not paid over as a result of the assessment, in other words the relevant amount after deducting the withholding tax.