Tax Newsletter

Value Added Tax (VAT)

• Ruling of the CJEU of 21 December 2023. VAT. Services rendered by company directors.
  • The CJEU rules on the question referred for a preliminary ruling by the Luxembourg District Court in relation to a dispute concerning a VAT assessment made in connection with the activity carried out by a natural person as a member of the board of directors of several Luxembourg public limited companies. In particular, the questions referred for a preliminary ruling concern whether the individual in question carries out an economic activity by virtue of the duties inherent to the position he holds on the board of directors and, secondly, whether this economic activity is carried out independently.
  • On the first question, the CJEU states that, for the purposes of the VAT Directive it must be interpreted that a member of the board of directors of a public limited company under Luxembourgish law carries out an economic activity where the member supplies services to that company for consideration, provided that such activity is of a permanent nature and is carried out in exchange for remuneration with predictable methods of determination. On the second question, the CJEU concludes that the VAT liability of such economic activity is contingent upon exercising the activity on an independent basis. In the present case, the Court reasons that although the natural person, as a member of the board of directors, is free to arrange how he performs the work, earns income in the form of emoluments, acts in his own name and is not subject to an employer-employee relationship – he does not act on his behalf or under his own responsibility and does not bear the economic risk linked to the activity. Therefore, the activity of a member of the board of directors of a Luxembourgish public limited company is not carried out on an independent basis and is therefore not subject to VAT.
• Supreme Court ruling of 11 December 2023. VAT. Exemption.
  • The Supreme Court rules on the appeal for cassation no. 4334/2022 filed against the ruling of the Supreme Court of Castilla y León, which upheld an appeal against the decision of the Castilla y León economic-administrative court in relation to a claim filed by the City Council of Quintanilla del Agua y Tordueles (Burgos) concerning VAT, and in particular VAT on hunting activities. The question before the High Court is whether, for the purposes of the exemption that applies to leasing operations which are considered services and to the creation and transfer of rights in rem of enjoyment and use, the exemption must be understood to apply to leases of rural land, regardless of what the land is used for, including hunting activities, or whether, on the contrary, it must be considered that any economic use of such land (including hunting) “excludes the application of the exemption”.
  • The Supreme Court dismisses the appeal and answers the question raised in such a way that, for the purposes of applying the exemption to leases that are considered services and to the creation and transfer of rights in rem of enjoyment and use, currently included in art. 20.Uno.23º a) LIVA (VAT Law), the leasing of land used for hunting is not included in the aforementioned exemption.
• Binding Consultation V3095-23 of 27 November 2023. VAT. Applicable tax rate.
  • The inquiring company is a public body in charge of providing health care and social services to group members. The query submitted to the Tax Directorate concerns the VAT treatment of special orthoprosthesis products in the portfolio of services offered by the National Health System. Specifically, the question raised by the inquiring company concerns the VAT rate applicable to invoices for orthoprosthetic products.
  • In its response to the query, the DGT states that it is not responsible for determining whether a given product is classified as a prosthesis, orthosis, special orthoprosthesis or surgical implant. However, once the product is classified as a prosthesis, orthosis, special orthoprosthesis or surgical implant by the competent body, it must meet the requirements in the VAT regulations, i.e., it must be a product which, due to its objective characteristics, is designed to alleviate or treat impairments and must be intended for the personal and exclusive use of persons with physical, mental, intellectual or sensory impairments or, in the case of the 4% rate, for persons with a disability of 33% or more. Consequently, deliveries, intra-community acquisitions and imports of prostheses, orthoses, orthoprostheses and surgical implants are subject to VAT at the rate of 10%. Therefore, deliveries for people with disabilities are taxed at a rate of 4% if they are acquired by a disabled person, and the supplier must have records documenting the delivery to that person, whose disability of 33% or more must be duly accredited.

Corporate Income Tax (IS):

• Ruling of the High Court of Justice of Madrid of 25 October 2023. Corporate tax. Related party translations. Very personal services.
  • The Madrid Superior Court dismisses the contentious-administrative appeal filed against the resolution of the Regional Economic Administrative Court (TEAR) in which it agreed to dismiss the economic-administrative claims filed against the settlement agreements issued by the State Tax Administration Agency (AEAT) for corporate tax in financial years 2011 to 2013. The Court analyses the correctness of the assessment of related-party transactions between a TV presenter and the entity of which he is the majority shareholder, as well as the deductibility of certain expenses.
  • The High Court of Madrid affirms that the contracts provided demonstrate that the services of the natural person shareholder were essential to the service agreements, given that the plaintiff did not have the material or human resources to provide such highly personal services as those of a television program presenter. Therefore, the partner and sole director was correct to report on his personal income tax (IRPF) return the income earned for the provision of services that he rendered and that only he could render. Moreover, the amounts received from his company were well below the invoiced amounts and the fair market value between independent parties. As for the deductibility of the clothing expenses claimed by the appellant, the Court affirms that insofar as they can be used for private purposes and are paid for by a third party company, their connection with the plaintiff’s business activity has not been proven.
• Binding Consultation V2969-23 of 13 November 2023. Corporate tax. Financial expenses. Deduction limit.
  • The inquiring company, a Spanish company resident in Spain, is the representative of a tax group that files its taxes on a consolidated basis. On 4 January 2013, the inquiring company took a loan from the related party, Y, resident in the United Kingdom, which was used entirely to acquire shares in entity X, a non-related entity resident in Spain, on 9 January 2013. The question posed to the Tax Directorate is whether the interest on the loan signed by the inquiring company can be deducted for an amount of one million euros or, on the contrary, if the rule established in article 67.b) LIS does not apply to this amount. In other words, whether or not, considering that the operating result of the consolidated group, not counting the operating result of the acquired entity X, is negative, the interest accrued on the loan used for its acquisition is deductible up to the limit of one million euros.
  • The Tax Directorate responds to the query raised by indicating that the limit established in article 67.b) LIS is additional and prior to the one provided, in general, in article 16.1 of the same law. Therefore, the limit in Article 67.b) LIS must be applied first, and once the net financial expenses that are tax deductible under the special tax rule have been determined, those expenses must be added to any other net financial expenses reported by the entity in order to then apply the general limit contained in Article 16.1 LIS.

Personal Income Tax (IRPF):

• Ruling of the Supreme Court of 15 December 2023. Personal income tax. Exemption.
  • The Supreme Court rules on the cassation appeal filed against ruling no. 232/2021, of 14 July, issued by the High Court of Madrid in which it dismissed the appeal filed against the resolution of the Directorate General of Personnel Costs and Public Pensions. The question before the court is whether, in relation to the tax exemption for pensions for disability or permanent incapacity under the Public Servant Retirement Pensions Regime, as outlined in Article 7.g) of the Income Tax Law, the eligibility requirement specified in this regulation can be considered fulfilled for the purpose of qualifying for the exemption, which states that the injury or illness leading to the pension must completely incapacitate the pension recipient for any profession or trade. The dispute arises when the incapacitation is not initially determined by the retirement authority but occurs later due to the worsening of the pensioner's health. In such cases of deterioration, the pension recipient is allowed to request an increase up to 100% of the amount to which they would have originally been entitled.
  • The High Court declares as a matter of jurisprudential doctrine that pensions received for a recognised permanent disability under the Public Servant Retirement Pensions Regime which are increased due to a worsening of the recipient’s illness or injury are exempt from personal income tax (IRPF). This deterioration must be confirmed by a mandatory and binding opinion issued for this purpose by the corresponding expert medical body. This aggravation must occur after the recognition of the retirement pension and before reaching mandatory retirement age. In addition, the aggravation of the illness or injury must render the pension recipient incapable of performing any profession or trade at the time of requesting the pension increase. The exemption takes effect on the first day of the month after the filing date of the request that results in a decision to increase the pension.