Tax Newsletter

Value Added Tax (VAT)

• Judgment of the Supreme Court of 16 November 2022. VAT Accrual. Remuneration of insolvency administrators.
  • The issue in question in the present appeal is to determine whether the accrual of Value Added Tax for the services provided by the insolvency administrators occurs at the end of each of the phases of the insolvency proceedings or, on the contrary, it occurs at the end of the insolvency proceedings as a whole. In the latter case, the presumption is that the insolvency administrator provides his services in a continuous and uniform manner throughout the insolvency proceedings, irrespective of the different phases, thus providing a single service.
  • In the light of the interpretative criteria set out in this judgment, the Supreme Court holds that the accrual of VAT for the services provided by the insolvency administrators occurs at the end of each of the phases of the insolvency proceedings. This is based on the fact that the Supreme Court judgments referred to in this resolution allow for differentiating between the different services provided at each stage, as they give rise to individualised remuneration.
• Resolution of the TEAC of 21 November 2022. VAT. Exemption for second and subsequent deliveries of buildings. Refurbishment works.
  • In the case at issue in this dispute, by means of a public deed of sale, an entity acquires eleven twelfths of a building for a price of approximately 5 million euros plus VAT. As can be seen from the deed, the acquisition of the property was made with the intention that the acquirer would carry out its refurbishment. Therefore, the transaction was subject to and not exempt from VAT, in accordance with Article 20. One.22.b) of the VAT Act. It must therefore be examined whether the exception to the exemption provided for in point b), relating to buildings, applies in the case in question.
  • The criterion of the TEAC is that the works related to the refurbishment works count for the purpose of verifying whether the requirement envisaged in paragraph 1 of art. 20 One. 22º B) of the VAT Act is met and, consequently, the matter is to determine whether they are refurbishment works. The category of “related works” requires the fulfilment of several requirements. Among these, their total cost must be lower than that derived from the works of consolidation or treatment of structural elements, façades or roofs and works analogous to these. If it is higher, the legal requirements for its qualification as related works would not be met, so its amount would not be added to that of the structural or similar works, for the purpose of verifying compliance with the requirement that this sum exceeds 50% of the total cost of the project.

Personal Income Tax

• Judgment of the National High Court of 23 May 2022. IRPF/IRNR. Non-competition clause. Change of residence.
  • The Administrative Chamber of the National High Court has set as the matter in dispute in the present case the nature of the sums received by the appellant as payment for the non-competition agreement, where such appellant receives it in Spain, but has changed his residence to Uruguay.
  • The National High Court hold that the change of residence, as we have said, does not affect such nature, as the income, regardless of the withholding tax, continues to derive from earnings based on an employment contract. Therefore, contrary to what has been argued by the appellant, this is not so-called “other income” pursuant to Article 20 of the Convention signed between the Kingdom of Spain and the Oriental Republic of Uruguay, which is only subject to taxation in the State of residence; but rather income derived from work regulated in article 14, which establishes that income from work shall be taxed in the State of residence, “unless employment is exercised in the other Contracting State”. This is precisely what has occurred in the present case. The employment was carried out in the Kingdom of Spain and the source of the income is in Spanish territory. Therefore, the Chamber holds that this is employment income generated in Spain and that the withholding has been correctly made in the country of the source of income, and the requested refund cannot be granted. The fact that the payments have been made after termination should not hide the fact that the earned income was generated in Spanish territory. This is not altered by the covenant of different times for payment, or the fact that the covenant is rendered null and void in the event of breach or replacement with payment of an insurance policy in the event of death. Payments received under a non-competition agreement are employment income that will be taxed in Spain, even if the taxpayer changes his residence to Uruguay, because they constitute income that is taxable in the state of source.

Corporate Income Tax

• Judgment of the Supreme Court of 1 December 2022. Corporate Income Tax. Finance expenses. Loan directly or indirectly related to the exercise of the company's business activity.
  • The question which is of interest for the formation of case law is whether any substantiated and accounted expense which does not denote a direct and immediate correlation with business income must necessarily constitute a non-deductible gift, even if such expense cannot be considered, strictly speaking, as a donation or a gratuitous gift.
  • The Supreme Court has issued judgments and established the following case law, as per the doctrine established in the STS of 30 March 2021 (appeal 3454/2019) art. 14.1.e) of Royal Legislative Decree 4/2004. It must be interpreted in the sense that the proven and accounted for expenses are not deductible when they constitute donations and gifts, with donations and gifts being understood to be disposals of economic significance that can be accounted for, and made free of charge; however, expenditures made for public relations with customers or suppliers, those made in accordance with custom and practice in respect of the company's staff and those made to promote, directly or indirectly, the sale of goods and the provision of services are deductible if they are conceptually considered as an accounting and book expense free of charge, the sale of goods and the provision of services, and all others which, although not expressly included in this list, have the same structure and are related to the business activity and are intended to improve the business result, directly or indirectly, presently or in the future, provided that they are not intended for shareholders or equity holders. In the present case, the Supreme Court holds that the financial expenses accrued for a loan that is directly and immediately related to the company's business activity, although not to a specific cash inflow or transaction, do not constitute a donation or gift as they originate in valuable consideration, just like the loan to whose fulfilment they are related. And they will be tax deductible for the purpose of determining the taxable base for corporate income tax provided that they meet the general requirements for deductibility of the expense, i.e., accounting recognition, allocation on an accrual basis and supporting documentation.

• Judgment of the Supreme Court of 16 November 2022. FEAC regime. Directive 90/434/EC. Valid economic reason. Restructuring of the corporate group. Division.
  • In the present appeal, the following question was raised as a matter of appeal: “Determine whether Articles 49 and 63 of the Treaty on the Functioning of the European Union, Articles 1, 4.1, 8.1 and 11.1.a) of Council Directive 90/434/EEC of 23 July 1990 on the common system of taxation applicable to mergers, divisions, transfers of assets and exchanges of shares concerning companies of different Member States, and the case-law of the Court of Justice of the European Union prohibiting discrimination against companies on grounds of their nationality, preclude the requirement of a valid economic reason for restructuring operations carried out by Spanish subsidiaries, even if they form part of restructuring operations of the corporate group ordered by the Swedish parent company and the existence of a valid economic reason for the latter is not disputed, since the divisions carried out by the Spanish subsidiaries are considered unnecessary for an orderly restructuring”.
  • In order to resolve the question raised, the Supreme Court studies Community case law on valid economic motives and establishes that the Administration must carry out a joint examination of the transactions carried out, and that it is up to the latter to prove tax evasion or avoidance, and also to prove that there is no valid economic reason. The High Court also held that the tax advantage is inherent in the deferral scheme itself, since it is characterised by its tax neutrality. Hence, the tax component is neither a deterrent nor an incentive, the aim being to promote restructuring through tax neutrality. A tax benefit is prohibited where such benefit becomes the object and purpose of the transaction, rather than the economic or business reasons for it. Finally, the Supreme Court notes that the administration cannot apply what is called - in the Court's own words - an economy of inverse choice. In the present case, the Court agrees to uphold the ground raised by the appellant.

Other decisions of interest

• Judgment of the CJEU of 8 December 2022. Information. Combating aggressive tax planning. Obligation imposed on the lawyer to inform the other intermediaries involved. Infringement of the right to secrecy of communications with the client.
  • The Court recalls that Article 7 of the Charter of Fundamental Rights of the European Union protects the confidentiality of all correspondence between private individuals and offers enhanced protection in the case of exchanges between lawyers and their clients. This specific protection of the professional secrecy of lawyers is justified by the fact that they are entrusted with a fundamental task in a democratic society, namely the defence of the litigants. This task requires that every litigant has the possibility to address his or her lawyer in full freedom, a possibility that is recognised in all Member States. Professional secrecy also covers legal advice, both as regards its content and its existence. Except in exceptional situations, clients should be able to have legitimate expectations that their lawyer will not disclose to anyone, without their consent, that they have availed themselves of his or her services. However, the obligation laid down in the Directive for the intermediary lawyer subject to professional secrecy to notify other intermediaries without delay of his obligations to disclose information means that those other intermediaries will become aware of the identity of the intermediary lawyer. They will also become aware of his assessment that the tax mechanism in question is subject to disclosure and that he has been consulted in this respect. This notification obligation interferes with the right to secrecy for communications between lawyers and their clients, as guaranteed by Article 7 of the Charter of Fundamental Rights. Since other intermediaries are obliged to inform the competent tax authorities of the lawyer's identity and consultation, this obligation also indirectly implies a second interference with the right to professional secrecy.
  • The obligation to disclose information incumbent on other intermediaries that are not subject to professional secrecy and, in the absence of such intermediaries, on the concerned taxpayer, ensure, in principle, that the tax administration is informed. After receiving such information, the administration may request additional information directly from the taxpayer concerned, who may then turn to his lawyer for assistance. The administration can also carry out an audit of the tax situation of such a taxpayer. The Court therefore holds that the notification requirement laid down in the Directive is not necessary and therefore infringes the right to secrecy of communications between lawyer and client.
• Resolution of the TEAC of 16 November 2022. LGT. Collection proceeding. Transfer of subsidiary liability. Chain tax liability.
  • The factual background that is presented relates to the transfer of liability to a company, pursuant to article 42.2.a) of the LGT, against the obligations of another company, with a scope of approximately 3,400,000 euros. As there were insufficient assets in the entity declared liable, it was declared in partial bankruptcy, with liability for such obligations transferred to a natural person pursuant to article 43.1.b) of the LGT. This agreement was challenged before the TEAR, and subsequently before the TEAC on appeal, on the grounds that the Spanish state tax agency AEAT is making an abstraction of the principle, denying that it is obliged to pay tax.
  • The TEAC, following the criterion set out in the STS of 10 July 2019 (appeal 4540/2017), considers that, for the purposes of a possible transfer of liability, this is fully enforceable not only to the taxpayers expressly indicated in Article 35.2 of the LGT of 2003 (letters “a” to “k”), but also, as the regulation itself states when it says that said taxpayers are “among others”, we must consider those liable to be included among “those other” taxpayers, as expressly laid down in article 35.5 of the same Law.

• Judgment of the Supreme Court of 25 November 2022. LGT. Liability. Suspension of the tax debt. Guarantee by the principal debtor. Extension
  • The issue in the appeal is whether the guarantee provided by the principal debtor can be transferred to the jointly and severally liable parties, whereby the latter could obtain the suspension of the agreement for transfer of joint and several liability without the need to provide a guarantee in administrative proceedings, simply by noting the fact that the principal debtor provided the corresponding guarantee to cover payment of the tax debt; or whether, on the contrary, the Administration can demand the guarantee from each and every one of the jointly and severally liable parties, in such a way that the measures agreed with respect to the main debtor cannot be extrapolated to the jointly and severally liable parties.
  • The Supreme Court has established as a doctrine that the guarantee provided by the main debtor can be transferred to those jointly and severally liable, so that they can obtain the suspension of the agreement for transfer of joint and several liability without the need to provide a guarantee in administrative proceedings. Such parties need only point out that the principal debtor provided the corresponding guarantee to cover payment of the tax debt, with the proviso that the guarantee was not sufficient. In such a case, it would be justified to require that the responsible party provide a guarantee the outstanding unsecured debt to obtain suspension.