Tax Newsletter - September 2020 | Resolutions
Tax Newsletter - September 2020 | Resolutions
Corporate income tax.- Costs incurred in the buying and selling of properties as a business have to be reported when they occur, even if the revenues occur in later years
Directorate General for Taxes. Resolution V2090-20 of June 23, 2020
The issue concerned a company that had elected the special regime for companies engaged in property leasing, which intended to carry on a second activity of buying and selling properties. In conducting this new activity, the company incurred overheads (directors’ compensation, office rental, interest on finance to buy real estate assets, etc.) and incurred expenses and steps performed to achieve sales of the assets (research and determining when and how to put the assets up for sale, marketing activities for sales, etc.). Expenses may be incurred in years before the years when the revenues occurred.
The DGT requested a report from the Spanish Accounting and Audit Institute (ICAC) on the accounting treatment of such expenses. The ICAC concluded that those expenses cannot form part of the price paid to buy the inventories or be recorded as prepaid expenses, and that they must be recognized in the income statement in the year they occur, as stated in the accrual principle. This principle must also be followed, therefore, in relation to the ability to deduct the expenses.
Corporate income tax.- Preparatory activities for a real estate development activity are not treated as an economic activity
Directorate General for Taxes. Resolution V2100-20 of June 23, 2020
A company had transferred its investment in another company. The transferred company owns various plots of land. One of them was intended to be leased for use as a parking lot; the others, plots of non-developable land, were bought with the aim of amending the General Urban Zoning Plan for residential and commercial development. In relation to these plots, steps were taken at the council that originally approved the amendment to the urban zoning plan, although it later gave notification that it was discontinuing the amendment process. An application for judicial review was filed against the decision to discontinue. For the conduct of these activities, the company does not have an employee with an employment contract; although the transferring shareholder provides real estate management services to it, and has staff hired on a full time basis.
It was asked whether the transferred company qualifies as a holding company, for the purposes of the relief under article 21 of the Corporate Income Tax Law. The DGT concluded as follows:
- Because the company does not have any individuals hired under employment contracts, it does not meet the requirements for considering that a property leasing economic activity is carried on in relation to the leased land.
- Moreover, it has not carried on a real estate development business either because only administrative tasks have been performed (the intention or wish to conduct it does not mean that it actually started).
On that basis, it must be concluded that the company is a holding company.
Corporate income tax.- A company created outside Spain whose only shareholder and director is resident in Spain may be treated as tax resident in Spain
Directorate General for Taxes. Resolution V1964-20 of June 16, 2020
The submitter is an individual resident in Spain who was considering setting up a company in Estonia, and would be the only shareholder and director of that company. They would continue residing in Spain and working from their home in Spain as a self-employed worker for their own company, for which they would receive monthly payments.
The DGT recalled that, even if the company is set up under Estonian law and is domiciled in that country, it could be treated as tax resident in Spain if the management and control of its activities were carried out from Spain, which could occur because its only shareholder and director resides in Spain.
If, under Estonian domestic law, the company is also treated as resident there, the tax treaty between both countries would have to be applied, which states that the competent authorities in the contracting States must make every effort to resolve the case through a mutual agreement procedure, taking into account the place of effective management, the place of formation, and that of any other relevant economic and physical factors.
Corporate income tax.- There is no obligation to withhold tax on a capital increase out of reserves or additional paid-in capital
Directorate General for Taxes. Resolution V1809-20 of June 8, 2020
A company's shareholders’ meeting resolved to increase capital (by issuing new shares), out of voluntary reserves or additional paid-in capital. The resolution took place in the context of its shareholder compensation policy, which allows shareholders to choose to receive shares issued at no charge, by selling their preemptive subscription rights at the company (at a predetermined price), or by selling those rights at the market price from time to time.
After a report was requested from the ICAC on the accounting treatment of the transaction, it concluded that the sums or assets received by the shareholders must be treated as dividends, regardless of whether they receive (i) shares issued at no charge, (ii) cash in respect of the sale of subscription rights at the company, or (iii) rights that they can transfer on the market; whether these awards are made out of reserves or additional paid-in capital
The dividends may be exempt (article 21) in every case, if the relevant requirements are met. In the particular case of a payment out of additional paid-in capital, the tax value of the shareholder’s interest must be reduced; the excess over that value must be included in the shareholder’s tax base as a dividend, with entitlement, if applicable, to that relief.
Under the applicable legislation, none of these cases will trigger the obligation to make a withholding or advance payment of corporate income tax.
Corporate income tax.- The special property leasing regime cannot be applied for properties leased to commercial companies
Directorate General for Taxes. Resolution V1699-20 of May 29, 2020
A company that elected the special property leasing regime plans to lease a residential property to a commercial company, which will use it for temporary accommodation for individuals (the tenant’s workers) identified in the contract, and the tenant has agreed not to alter that use.
The DGT stated that leases are only allowed to benefit from this regime if their primary purpose is to satisfy the tenant’s permanent accommodation needs, which does not occur where the residential properties are leased to commercial companies, even if they then supply them for use by individuals. This circumstance also affects fulfillment of the minimum three year period in which the residential properties must be leased (with a potential obligation to adjust previous years) and affects calculation of the minimum income to asset ratios.
Corporate income tax.- A real estate tax expense charged by the lessor under a finance lease is not affected by the limit on deduction of finance costs
Directorate General for Taxes. Resolution V1601-20 of May 26, 2020
A Spanish company carries on its business activity at a building it leases from a financial institution under a real estate lease finance lease agreement. The finance lease agreement stipulates that all taxes and costs incurred in respect of the building would be at the expense of the lessee. As a result of this clause, the financial institution has been charging the lessor for real estate tax on the building, an expense that the lessee company recorded in account 6310, defined as “Other taxes”.
It was asked whether that expense may be affected by the limit on the deduction of finance costs, due to the real estate tax charge being related to a debt or whether, by contrast, that limit does not apply because it is a tax charged on ownership of the building.
The DGT recalled that, in line with the resolution issued on July 16, 2012, the finance costs that must be included for calculating the limit are those in respect of the company's debts, recognized in accounts 661, 662, 664 and 665. Therefore, if the accounting rules applicable to the agreement concerned do not require the mentioned accounts to be used for their correct recognition, that agreement does not have to be taken into account for determining the net finance expense in the year affected by the limit.
Corporate income tax and nonresident income tax.- Traveling and accommodation costs of a nonresident director are not subject to withholding tax and are deductible under the standard rules
Directorate General for Taxes. Resolution V1396-20 of May 13, 2020
The submitter pays certain traveling and accommodation expenses in relation to the activities carried out by its chief executive officer resident in Italy. These expenses are incurred to provide the officer with the funds he needs to travel to Spain and stay there temporarily, for the sole purpose of carrying out his work and performing his duties.
In relation to this case, the DGT set the following guidelines:
- Under the tax treaty signed with Italy, if the expenses are paid directly by the company and no private gain is obtained by the chief executive officer, it may be concluded that these payments do not determine the existence of income for the officer for nonresident income tax purposes, so the company is not required to withhold any tax on those payments.
- In relation to corporate income tax, the DGT mentioned the following:
- The standard rules on the deduction of an expense (article 10.3 and article 11.3 of the law).
- The inability to deduct gifts or gratuities and the fact of these not including compensation paid to directors for the performance of senior management functions, or other functions under an employment contract with the entity.
- The inability to deduct expenses incurred to carry out activities that are against the law.
On the basis of that legislation, it concluded that the amounts paid by the company qualified as tax deductible expenses, provided that the statutory requirements are met in terms of their accounting treatment, occurrence, having matching revenues and expenses and being supported.
Corporate income tax.- Nonmonetary contributions of ownership interests in joint-property entities may benefit from the neutrality regime
The issues analyzed in these resolutions concerned whether the neutrality regime may be applicable for the contribution (to newly created or existing entities) of ownership interests in joint-property entities engaged in property leasing.
The DGT concluded that these are special nonmonetary contributions eligible for the neutrality regime, if they are made for valid economic reasons and additionally the following requirements are met:
- The transaction must imply the contribution of assets used for economic activities.
- The joint-property entities must keep their accounts in line with the Commercial Code.
- The entities receiving the contributions must be resident in Spain.
- Following the contribution, each of the joint owners must have an interest equal at least to 5% of the capital of the beneficiary of the contribution.
Corporate income tax.- Residential properties that can be used under a usufruct right or lease are not eligible for the special property leasing regime
Directorate General for Taxes. Ruling V1354-20 of May 12, 2020
A company that had elected the special regime for companies engaged in residential property leasing was going to acquire an undivided half of the temporary usufruct right in an apartment that was leased for a 10-year term. It was asked whether the rental income attributable to the company could benefit from the special property leasing regime.
The DGT noted that the rules governing this special regime require the residential properties to have been built, developed or acquired by the company. As a result, residential properties that are used under any other legal instrument, such as a usufruct right, temporary exploitation right, lease, etc., do not qualify for the purposes of claiming this special regime.
Personal income tax.- The number of days spent in Spain during the state of emergency counts for the purpose of the 183 day limit determining tax residence
Directorate General for Taxes. Resolution V1983-20 of June 17, 2020
A couple who are tax resident in Lebanon arrived in Spain in January 2020 for a three month trip, but, due to the state of emergency, were unable to return to their country. They do not receive any income in Spain and ordinarily spend less than 6 months a year in Spain. It was asked whether the days spent in Spain during the state of emergency count for determining tax residence in Spain.
As we reported in our alert dated July 28, 2020, the DGT concluded that the days spent in Spain during the state of emergency count for the purpose of determining the number of days spent in Spain in 2020.
Personal income tax.- The amounts received by a director from a legal expenses policy taken out by the company are taxable as a capital gain
Directorate General for Taxes. Resolution V1936-20 of June 15, 2020
The submitter is a director of a company that has taken out a legal expenses policy for its directors. As a result of a legal proceeding brought against the directors, the insurance company refunded the incurred legal expenses to the submitter.
According to the DGT, this refund qualifies as a capital gain which, due to not coming from a transfer, is included as a general taxable income. This gain cannot be reduced by the amount of legal expenses, because the legislation only allows to be treated as such those resulting directly from lawsuits arising in the taxpayer’s relationship with the person receiving their salary income (within a limit of €300 a year).
If, under the policy, the requesting party is held liable and has to refund to the insurance company any amounts already received, they may request correction of their tax return to remove that capital gain.
Personal income tax.- The existence of a short period of unemployment does not prevent the ability to apply the inbound expatriates regime
Directorate General for Taxes. Resolution V1482-20 of May 20, 2020
The submitter gave notification of their election of the special regime for workers sent to Spain for the 2016-2021 period. On November 6, 2019 the worker voluntarily resigned from his employment relationship. At that time he was involved in negotiations with another employer, although the employer ultimately chose another candidate. On December 12, 2019, the submitter registered as an unemployed worker with the State Public Employment Service. He has now been in a new job since March 3, 2020.
The DGT concluded that the described circumstances do not result in his exclusion from the special expatriates regime, in that his resignation from his employment relationship took place for the purpose of commencing a new employment relationship with another employer, even though that relationship did not finally occur, which meant that the taxpayer was unemployed for the described period.
Nonresident income tax.- A French entity owning a property in Spain used by its partners is taxable in Spain
Directorate General for Taxes. Resolution V1888-20 of June 10, 2020
A French partnership-type entity whose partners and directors acting severally are two individuals who are also French resident purchased a property in Spain, as an investment in real estate for its future sale. Until the sale takes place, the partners intend to spend around one month at the house in one continuous period or several intermittent periods.
Under the assumption that a partnership-type entity has its own legal personality and is not subject to the legal regime for partnerships, but has elected to be taxed as a taxable person for French corporate income tax purposes; and in light of the nonresident income tax law and the tax treaty between France and Spain, the DGT stated as follows:
- Until the sale of the property takes place, the company will not have to appoint a representative in Spain because it is not engaged in any activity there.
- The permission to use the property given by the company to its partners is presumed to be in exchange for payment. The presumed income must be valued at its market value because the permission to use it is arranged between related parties; and may be taxed in Spain.
- In the hands of the owners, the right to use the properties must be treated as a dividend or as directors’ compensation, according to whether they use the property as owners or directors, respectively. Otherwise, it must be classed in the “other income” category. In the three cases, France is the only country with the power to tax that income, because both the company and the owners reside in France.
Municipal capital gain.- Irrevocable gifts with effects that are postponed until the giver's death may benefit from the reductions allowed for inheritance
Directorate General for Taxes. Ruling V1356-20 of May 12, 2020
The legislation governing the tax on increase in urban land value allows local councils to approve a reduction of up to 95% to the gross tax payable on transfers of land upon death to descendants, adopted offspring, spouses, ascendants and adopting parents.
In this resolution, the DGT accepted the option to claim this reduction in the case of an irrevocable gift taking effect on the date of the giver’s death; as long as the tax rules governing the tax allow this reduction on the date the giver's death occurs and all the other requirements laid down in those rules are also met