Tax Newsletter

Value Added Tax (VAT)

• Ruling of the Court of Justice of the European Union of 8 September 2022. VAT. Directive 2006/112/EC. Holding company.
  • The matter at issue relates to a company whose corporate purpose consists of the acquisition, administration and operation of real estate, as well as designing, developing and carrying out construction projects. This company made a corporate contribution to another enterprise which consisted of providing, free of charge, a series of services in relation to a construction project, as well as accounting and management services for a consideration. The enterprise deducted the input VAT on these activities, which the German Authorities considered they were not entitled to do, as these activities had not served to generate income. After several stages of litigation, the case was referred to the Bundesfinanzhof (German Supreme Tax Court).
  • The Court ruled that Article 168(a) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, read in conjunction with Article 167 thereof, must be interpreted as meaning that a holding company which carries out taxable output transactions in favour of subsidiaries is not entitled to deduct the input tax levied on the services that it obtains from third parties and supplies to the subsidiaries in return for the grant of a share in the general profit, where, first, the input services have direct and immediate links not with the holding company’s own transactions but with the largely tax-exempt activities of the subsidiaries; second, those services are not included in the price of the taxable transactions carried out in favour of the subsidiaries and, third, the said services are not part of the general costs of the holding company’s own economic activity.

Personal Income Tax (IRPF)

• Supreme Court ruling of 26 July 2022. Personal Income Tax. In kind income. Related parties.
  • The facts in question focus on the adjustment made to the company Neptuno 98 SL. That company is wholly-owned by a married couple, each one with a 50% shareholding. The company incurred a series of personal and private expenses and costs unrelated to the company’s business activity, which the owners did not include as in kind income on their Personal Income Tax returns, deducting the expenses on their Corporate Tax returns. The question at the heart of the appeal is to clarify whether, in cases of in kind income between related parties pursuant to Article 25.1.d) LIPRPF, the corporate income tax regulations of Article 41 LIRPF (Personal Income Tax Law) must be applied, which would require the valuation of related party transactions and application of the valuation methods regulated in corporate income tax laws, or whether, on the contrary, they can be measured at fair market value pursuant to Article 43 LIRPF and, if so, in which cases.
  • The High Court dismissed the appeal on the grounds that it is not really a related-party transaction. The above notwithstanding, section one of Article 43 LIRPF establishes that in kind income shall be measured at fair market value, without prejudice to the introduction of a series of "specialities" in the valuation of "in kind income" and “in kind capital gains", which do not include in kind investment returns. Therefore, considering the second paragraph of that article which reiterates that in kind income shall be measured according to the rules contained in this Law, it must be concluded that under the circumstances in this case, the valuation rules must be the ones contained in Article 41 LIRPF, which does not exclude in kind investment returns.
• Supreme Court ruling of 1 September 2022. Personal Income Tax. Form 720. Penalties. Reiteration of doctrine.
  • The question at the heart of the appeal consists of determining whether the three-month period provided for in Article 209.2 LGT (General Tax Law)for the initiation of penalty proceedings arising from the commission of a tax offence applies only to the initiation of penalty proceedings stemming from previous proceedings initiated in response to a tax return, inspection or verification process; or whether, on the contrary, it also applies to a breach of a formal duty to file a tax return in a timely manner, as occurs in the particular case where there is an obligation to report assets and rights located in a foreign country, which is regulated in the eighteenth additional Provision LGT.
  • Reiterating the legal doctrine established in our Supreme Court rulings of 4 and 6 July 2022, cit., and in accordance with the CJEU ruling of 27 January 2022 (case C-788/19), we find that the penalty system established in Additional Provision 18(2) LGT, in the wording contained in Law 7/2012 of 29 October, consisting of a fixed monetary fine for late compliance with the obligation to report assets and rights abroad, when there is no prior request from the Administration, violates the obligations incumbent upon the Kingdom of Spain under Article 63 TFEU and Article 40 of the European Economic Area Agreement on the free movement of capital, since those penalties are disproportionate to the ones that apply at the national level.
• Ruling of the High Court of Justice of Madrid of 23 February 2022. Personal Income Tax. Double taxation convention. Determination of residency. Kuwait.
  • The dispute in this case centres around the taxpayer's residence status for tax purposes. The statement of claim insists that during the 2014 financial year the appellant spent more than 183 days outside Spanish territory (Kuwait). It is noted that he is a tax resident of Kuwait and that the Administration has violated the doctrine of estoppel by allowing this situation to exist on the two self-assessments submitted and accepted in the same financial year in relation to returns on capital and real estate investments. Moreover, under Article 4 of the Convention between the Kingdom of Spain and the State of Kuwait for the avoidance of double taxation and for the prevention of fiscal evasion with respect to taxes on income and on capital dated 26 May 2008, any natural person domiciled in Kuwait and having Kuwaiti nationality, which he does not possess, is considered to be resident in Kuwait.
  • The High Court of Justice of Madrid considers that an absence of more than 183 days in one year, without proof of residence in another country, does not prove that the taxpayer is not subject to Personal Income Tax. Moreover, according to the Agreement with Kuwait, one is not a tax resident of Kuwait if he or she is not a Kuwaiti citizen. In the Court’s opinion, the fact that a person is absent for more than 183 days in one year, without proof of residence in another country, does not prove that the taxpayer is not subject to Personal Income Tax. According to the Agreement between Spain and Kuwait, only natural persons who are domiciled in Kuwait and who are Kuwaiti nationals are considered residents of Kuwait within the meaning of the Agreement.
• Binding Query V1579-22 of 30 June. Personal Income Tax. Capital losses. Cryptocurrencies. Scam.
  • The taxpayer lost an investment made in cryptocurrencies in 2021 on a fraudulent platform. He raises a question before the DGT (Directorate General of Taxation) about the possibility of reporting the loss on his Personal Income Tax return.
  • The Directorate General of Taxation allows such losses to be reported in the taxable income for the tax period in question as long as the requirements in Article 14.2 LIRPF are met, since this capital loss is not disclosed upon the transfer of a capital item in accordance with Articles 45, 46 and 48 LIRPF. In this case, the DGT admits that according to the facts set out above, it would not be possible to include it since, although it has been a year since it happened, the filing of a complaint does not constitute the commencement of legal proceedings aimed at enforcing the claim (Article 14.2.k.3 LIRPF). The above notwithstanding, by means of this binding query the Directorate General of Taxation is opening the door to deducting losses on investments in digital assets, in this case cryptocurrencies.

Corporate Income Tax (IS)

• Supreme Court ruling of 11 July 2022. Corporate Income Tax. Deduction. Remuneration of majority shareholder who is not a director.
  • This case is based on the Tax Administration's position that amounts paid to the non-director majority shareholder are not tax deductible, on the understanding that, as they are not mandatory, they are donations. However, in contrast to the Administration's position, the claimant organisation believes that these payments are deductible expenses and that the rules applicable to the compensation paid to directors should apply. The question at the heart of this appeal, therefore, is whether the appellant company can deduct as an expense the amounts paid to its majority shareholder, who is not a director, as a salary or compensation for work actually performed for the company.
  • The High Court finds that the cost of the compensation paid to a non-director majority shareholder for services rendered to the company is a tax-deductible expense for Corporate Tax purposes when, in compliance with the legally established conditions for commercial and employment purposes, there are accounting entries to support such costs, they are paid on an accrual basis and supported by documentary evidence.
• Supreme Court ruling of 26 July 2022. Corporate Income Tax. Financial expenses. Deductibility.
  • This case arises from a simultaneous capital reduction and increase (commonly known as an accordion feature) carried out by the claimant company. A loan agreement was signed on the same day as the transaction, a substantial part of which was used to finance certain distributions of reserves, and on the same day the Shareholders' Meeting approved the distribution of dividends to the shareholders out of the share premium that had materialised from the non-monetary contribution of the capital increase previously carried out. The Administration's position is that the financial expenses of that loan are not deductible because they do not correlate with income. Rather, it considers them to be donations, whereas the company believes that there is no animus donandi and that not every expense without a direct correlation to business income is necessarily a donation. The question that arises is whether any accredited and accounted expenditure that does not denote a direct and immediate correlation with business income must necessarily constitute a non-deductible donation, even if that expenditure cannot be strictly considered a donation or a gift.
  • The Supreme Court considers that financial expenses accrued on a loan that is directly and immediately related to the company's business activity, although not to a specific item of income or transaction, do not constitute a gift or donation because they emerge from a valuable consideration, as does the loan to which they relate, and will be tax deductible for the purposes of calculating the taxable base for Corporate Tax as long as they meet the general requirements for the deductibility of the expense, i.e., accounting entry, allocation on an accrual basis and documentary justification.

Other decisions of interest

• Ruling of the Court of Justice of the European Union of 15 September 2022. State aid. Gibraltar. National authorities. Possibility of applying a national provision to avoid double taxation.
  • The CJEU reasons that a measure such as that referred to in Article 37 of the ITA 2010, which seeks to avoid double taxation by prescribing a mechanism for the set-off of tax paid by a taxpayer abroad against taxes for which such taxpayer is liable in Gibraltar, falls, in principle, within the scope of the fiscal autonomy of the Member States and cannot, unless it is established that it is based on discriminatory parameters, be classified as prohibited State aid within the meaning of Article 107(1) TFEU, section 1. In that context, it should be recalled that EU Law on that matter seeks only to remove the selective advantages from which certain undertakings might benefit to the detriment of others which are placed in a comparable situation (ruling of 16 March 2021, Commission/Poland, C-562/19 P, EU:C:2021:201, paragraph 41). In the light of the foregoing considerations, the answer to the question referred is that Decision 2019/700 must be interpreted as meaning that it does not preclude the national authorities responsible for the recovery from the beneficiary of aid which is unlawful and incompatible with the internal market from applying a domestic provision which prescribes a mechanism for the set-off of taxes paid by that beneficiary abroad against taxes for which it is liable in Gibraltar, where it appears that that provision was applicable on the date of the operations in question.