Publications

Corporate Income Tax.- EU law precludes a national law that does not allow the compatibility of horizontal and vertical consolidation

Court of Justice of the European Union. Judgment of May 14, 2020. Case C-749 /18

A Luxembourg company -A- (with parent company in France) formed part of a tax group with subsidiaries resident in Luxembourg (vertical consolidation). Company A performed the functions of controlling company of the group.

Two Luxembourg companies -B and C- owned by the same French parent company (although A did not have an ownership interest in them), applied in December 2014 to form part of the tax group in fiscal years 2013 and 2014 (horizontal consolidation).

The authorities refused this request for the reason that company A did not own shares in B and in C, and the vertical and horizontal regimes are not compatible in the same group. For all the subsidiaries to be part of the same group, the existing group needed to be dissolved and a horizontal tax group formed by including all the subsidiaries. This dissolution would have adverse consequences because the minimum existence requirement for the original vertical group (five years) would not be met, which would make it necessary to adjust the tax position of the entities in that group.

The judicial review court with jurisdiction upheld the claim seeking to include the subsidiaries in the group in and after 2014, but dismissed it for 2013, because the application had been filed in 2014 and the law requires it to be made before the end of the year in which inclusion in the group is sought.

The Court of Justice of the European Union (CJEU) concluded that these rules undermine freedom of establishment, in that they are detrimental to cross-border scenarios with respect to purely internal scenarios with comparable circumstances, and no overriding public interest reasons were claimed in the proceeding that would justify this difference in treatment.

It held, however, that the principles of equivalence and effectiveness were not breached by the fact of not allowing consolidation where the application has not been made within the time limit (in the examined case, in 2013). In that regard:

Personal income tax.- If directors are not compensated for their services as such, their contributions as self-employed workers cannot be deducted 

Madrid High Court. Judgment of October 14, 2019

The court examined the case of a company director who did not receive any salary income from the company. On his personal income tax return, however, he reported an expense in respect of the cost of his social security contributions as a self-employed worker.

Madrid High Court concluded in this judgment that it is not allowed to deduct that expense in this case. In the court’s view, because he does not receive salary income for performing his services as director, it is not mandatory for the director to be included in the self-employed workers social security program, therefore the paid contributions are not deductible.

State aid.- EU law precludes applying a national limitation period to the recovery of state aid where the expiry of that limitation period is mainly due to delayed enforcement of the recovery obligation

Court of Justice of the European Union. Judgment of April 30, 2020. Case C-627/18

The Portuguese government implemented a credit facility program to help reduce the debt burden of companies in the farming and livestock industries, which was used by a company resident in Portugal.

The European Commission adopted a decision in 2000 finding that the program amounted to state aid incompatible with the common market, and required Portugal to remove that program and recover the aid that had been granted. As a result of that decision, the Portuguese government requiered the appellant company to repay the aid. In view of the repeated absence of any reply, an enforced collection procedure was initiated.

The Portuguese company challenged the enforcement procedure, by claiming that the obligation to repay the received amounts had expired under Portuguese law (five-year period).

The following questions were referred for a preliminary ruling:

Interpretation of EU law.- A national court does not have to adopt the most favorable interpretation of a provision of national law after that interpretation has been held incompatible with EU law

Court of Justice of the European Union. Judgment of April 23, 2020. Case C-401/18

A Czech road freight company transported fuel from various member states to the Czech Republic. The Czech tax authorities took the view that the company’s operations were not confined to the transport of fuel under an excise duty suspension arrangement; it also resold the fuel to other economic operators established in the Czech Republic. Accordingly, they concluded that the place of the acquisitions made by the company was not in the Czech Republic but in the member states where the fuel was located when it was loaded to be transported. In keeping with that conclusion, they refused to allow the company to deduct VAT on the acquisitions.

The court with jurisdiction to hear the appeal concluded that Czech law was ambiguous, in that the national law that transposed the VAT Directive allowed taxable persons to assume that the fact that goods are transported to another member state under an excise duty suspension arrangement affects the conditions which govern the transfer of the right to dispose of those goods as owner.

As a result of this conclusion, the Czech court submitted the following request for a preliminary ruling to the CJEU: whether EU law precludes a national court (confronted with a provision of national tax law, which has transposed a provision of the VAT Directive, and is open to several interpretations) from adopting the interpretation that is most favorable to the taxable person, after the CJEU has held that such an interpretation is incompatible with EU law.

The CJEU recalled:

The CJEU concluded therefore that EU law precludes an interpretation such as that contained in the request for a preliminary ruling referred to it.

Legislative amendments.- It is not contrary to the principles of legal certainty and legitimate expectation for the amendment of a tax rate to come into force in a very short period and without a transitional arrangement

Court of Justice of the European Union. Judgment of April 30, 2020. Case C-184/19

A Romanian company sold certain types of fermented beverages on which it charged excise duty at 0%. The Romanian tax authorities issued an assessment adjusting the charged rate, because on the date the sales occurred, they were subject to a higher rate of excise duty. The company filed an appeal to the referring court, pleading, among other arguments, that the regime that amended the rate was published without providing for a transitional regime and that it came into force only eight days after publication of the legislation concerned. For those reasons, the taxpayer considered that the principles of legal certainty, tax neutrality and tax certainty had been breached.

The CJEU concluded as follows:

VAT.- A permanent establishment for VAT purposes is not inferable from the fact of having a subsidiary

Court of Justice of the European Union. Judgment of May 7, 2020. CaseC-547/18

The Polish authorities argued in the case examined in this judgment that a subsidiary resident in Poland constituted a permanent establishment of a Korean company.

As we discussed in our alert on May 11 (see here), the requests for preliminary rulings concerned whether (i) the existence of a permanent establishment of a company may be inferred by a supplier of services from the fact that that company has a subsidiary in the member state concerned, and, (i) if the answer is no, whether it is required to examine contractual relationships between the parent company and its subsidiary to confirm whether they determine the existence of a permanent establishment.

The CJEU ruled that a supplier of services cannot infer the existence, in a member state, of a permanent establishment of a company established in a non-member state from the mere fact that that company has a subsidiary there; and additionally, that a supplier of services is not required to inquire, for the purposes of such an assessment, into contractual relationships between the two entities.

Tax on increase in urban land value.- The authorities have to issue as many tax assessments as there are taxable persons

Valencia High Court. Judgment of February 5, 2020

Three individuals transferred properties of which they were co-owners and reached an agreement with the authorities (according to the facts described in the judgment) determining that only one of them would appear as taxable person in assessments of the tax on increase in urban land value.

Valencia High Court recalled in this judgment that it is not allowable for the tax authorities, as a result of an agreement reached with the taxable persons, to attribute the whole tax debt to only one of them, because taxable person status is not transferable.

The court recalled that the taxable person is the person required by the law to perform the main tax obligation and the procedural obligations associated with it, and therefore it is not allowable for the tax authorities to attribute the whole tax debt to only one of several taxable persons. Finding otherwise would be a breach of the principle of economic capacity, because it means that one of the transferors will be taxed on an inexistent gain. This does not preclude the parties from agreeing over how the tax liability will be paid.

In keeping with the above reasoning, the court rendered the issued assessments void.

Tax on increase in urban land value.- Restriction on applying for a refund of final assessments of the tax on increase in urban land value in a proceeding to set aside a decision that is null and void by operation of the law  

Supreme Court. Three judgments dated May 18, 2020

In a judgment delivered on May 11, 2017, the Constitutional Court found that, in cases where a loss in value has occurred between the purchase and sale dates of the property, articles 107.1, 107.2.a) and 110.4 of the Local Finances Law, with the wording provided in Legislation Royal Decree 2/2004, of March 5, 2004 (TRLRHL), had to be held unconstitutional null and void.

The Supreme Court concluded in three judgments delivered on May 18 that assessments that became final before the decision holding those articles unconstitutional cannot be held null and void by operation of the law. See our alert on this judgment.

Tax on increase in urban land value.- To calculate length of ownership it is irrelevant whether the plot had not been urban land since its acquisition

Catalan High Court. Judgment of December 27, 2019

The appellant had acquired a rural piece of land that was reclassified as urban land. In a subsequent transfer of the land, it was raised whether the tax on increase in urban land value had to be calculated by reference to all the years the land was owned or only those when it had been classified as urban land.

The Catalan High Court concluded that the generation period to calculate the taxable amount for the tax on increase in urban land value must be calculated by reference to every year the property was owned, including the years when the plot was classified as rural land; because the plot’s land-use classification only has relevance when the taxable event occurs, which is when the land is transferred.

Tax on financial transactions.- The free movement of capital does not preclude the legislation of a member state which taxes financial transactions involving derivative financial instruments that have as their underlying asset an instrument issued by a company from that state

Court of Justice of the European Union. Judgment of April 30, 2020. Case C-565/18

Italian law levies a tax on, and lays down administrative obligations and the filing of a return for, financial transactions involving derivative financial instruments that have as their underlying asset an instrument issued by a company established in Italy. The responsibility for payment of that tax and for fulfillment of those obligations lies with the parties to the transaction, regardless of where the transaction is concluded or of the residence of the parties; or even of any intermediaries involved in carrying out the transaction.

A company having its registered office in France, which had carried out certain transactions in relation to derivative financial instruments whose underlying assets were shares in Italian companies, applied for a refund of the tax paid in Italy. In the appeal proceedings brought against the decision to refuse that refund, the referring court asked the CJEU whether EU law precluded that tax.

The CJEU examined the question from the standpoint of the free movement of capital:

On that basis, the CJEU concluded that the law at issue does not constitute a form of prohibited discrimination. It clarified, however, that the administrative and filing obligations accompanying this tax and incumbent on nonresident entities should not go beyond what is necessary for their collection.

Inheritance and gift tax.- Personal items cannot include income generating assets, assets used in activities, cash, or marketable securities

Supreme Court. Judgment of March 10, 2020

Article 15 of the Inheritance and Gift Tax Law provides that the personal items to be included in the assets available for inheritance must be valued at 3% of the deceased's estate, unless the taxable persons (i) allocate a higher value to them, or (ii) are able to provide verifiable evidence that none exist or that they have a lower value.

Basing its view on the principles of tax equality and economic capacity, the Supreme Court adopted a novel conclusion that personal items only include assets which, as a result of their characteristics, value and function, may be put to private or personal use by the deceased, and all others must be excluded. For that reason, any income generating assets, assets used in professional or economic activities, and in particular, cash, debt instruments and marketable securities, should be excluded.

The taxable person does not have to prove that these excluded assets do not belong to personal items, because by their very nature they cannot be included among those assets.

Form 720.- Imposing a penalty for every account not reported on Form 720 falls outside the proportionality principle

Extremadura High Court. Judgment of February 27, 2020

A person with tax obligations failed to include in his information return on assets located abroad (Form 720) five checking accounts he owned at a foreign bank. The tax authorities held that the taxpayer had committed five infringements and imposed a penalty for every account not reported.

Extremadura High Court held that where the breach of a procedural (rather than a substantive) tax obligation is involved it must be treated as a single infringement. In the court’s view, the penalty imposed by the tax authorities is incompatible with the principle of proportionality, and it held that, from the circumstances of the case, the minimum penalty had to be imposed.

Collection procedure. - The principles of effectiveness and tax neutrality require the calculation of interest on excess amounts of deductible VAT retained by a state in infringement of EU law to ensure that adequate compensation is received

Court of Justice of the European Union. Judgment of April 23, 2020. Joined cases C-13/18 and C-126/18

In this judgment, the CJEU examined a Hungarian practice of calculating interest on refunds of excess amounts of deductible VAT, which the authorities retained in infringement of EU law. The referring courts submitted, briefly, the following requests for preliminary rulings:

Management procedure.- VAT recapitulative statements and annual summaries of personal income tax withholdings do not interrupt the statute of limitations for the right to assess

Supreme Court. Two judgments dated May 18, 2020

The Supreme Court had been finding that the annual statements for VAT (form 390) and personal income tax withholdings (form 190) interrupted the statute of limitations for the tax authorities’ right to assess the tax debt in respect of these items.

In two judgments delivered on May 18, 2020, however, the court amended its interpretation by holding that those statements do not interrupt the statute of limitations. It concluded as follows:

Management procedure.- Rectification of a self-assessment return cannot be refused for procedural reasons only

National Appellate Court. Judgment of February 3, 2020

A taxpayer filed an additional corporate income tax self-assessment to report a higher amount in respect of tax loss carryforwards than it had originally reported. The tax authorities refused the application by arguing that the taxpayer should have filed a self-assessment correction form, not an additional self-assessment.

The National Appellate Court concluded in this judgment that the tax authorities acted incorrectly by refusing the application where the citizen’s intentions were clearly inferable from his actions. What the tax authorities should have done, if they considered that the chosen procedure was not the right one, was give the taxpayer the chance to file the proper application.

Audit procedure.- The examination of self-assessments in which tax loss carryforwards have been reported does not prevent those losses from being examined in a later audit

National Appellate Court. Judgment of October 25, 2019

In its 2004 corporate income tax self-assessment, the taxable person offset tax loss carryforwards (from 1995, 1997, 1998 and 2000). In an audit of that fiscal year 2004, the tax authorities disallowed the offset of tax loss carryforwards from 1997, because the taxable person had not proved from its accounting records that those tax losses were correct.

Against this, the taxable person pleaded that the tax loss from 1997 had already been reviewed by the tax authorities in an earlier audit. The 1997 tax loss carryforwards already appeared in the self-assessment for the year audited at that time and the auditors had not questioned whether they were allowable (estoppel doctrine).

The National Appellate Court concluded, however, as follows:

Tax options.- High courts issue contradictory decisions over whether tax loss carryforwards are a tax option

Madrid High Court Judgment of February 3, 2020; and Castilla y León High Court. Judgment of February 18, 2020

The Central Economic-Administrative Tribunal found in a decision delivered on April 4, 2017 that the offset of tax loss carryforwards is a tax option. Since then, numerous decisions have been issued by the high courts on this issue, with different conclusions (for the time being, neither the National Appellate Court nor the Supreme Court have ruled on this subject).

Examples include the recent judgments by the Madrid and Castilla y León high courts which conclude in one and the opposite direction (the first court found that the offset of tax loss carryforwards cannot be treated as a tax option, whereas the second reached the same conclusion as TEAC).