Newsletter Tax February 23

Tax Newsletter

February 23

Daniel Tarroja, Tax Partner | Jordi de Juan, Tax Partner
Newsletter Tax February 23

Personal Income Tax

  • Supreme Court Ruling of 6 February 2023. Personal Income Tax (IRPF). Capital gains or losses. Sale of a Pharmacy for gainful purpose.
    • The appellant is the owner of a pharmacy which was acquired through a gift from her father (10%) and the remainder through an inheritance from her father (90%). After filing a personal income tax return following the sale of the pharmacy, the State Tax Administration Agency issued a provisional assessment which increased the tax liability. The Tax Authorities disagreed that goodwill should be considered in the acquisition price, arguing that it should be the book value.
    • The underlying conflict in this case consists of determining whether, for the purposes of quantifying the capital gains or losses arising from the sale of assets connected with an economic activity and acquired for gainful purpose, the book value (article 37 personal income tax law) or the actual cash value of the assets up to the limit of market value (article 36 personal income tax law) should be used as the acquisition value.
    • The High Court ratifies the position of the appealed Ruling, considering the actual cash value of the assets, calculated according to the terms of LISD, as the acquisition value. Based on a systematic interpretation, it understands that article 37 personal income tax law does not apply here, since a Pharmacy cannot be considered an element with its own separate and individual accounting records because it was acquired for gainful purpose.
  • Supreme Court Ruling of 2 February 2023. Personal Income Tax (IRPF). Former members of the European Parliament. Voluntary pension scheme. Taxation.
    • Prior to the entry into force of the European Parliament Statute in 2009, MEPs received no compensation and were not entitled to a retirement pension. With the aim of creating a social security system, a voluntary pension scheme was approved in 1990 and a SICAV was set up based in Luxembourg, to which MEPs who joined the scheme voluntarily were required to contribute funds, on the understanding that for every euro they contributed the European Parliament would contribute an additional two euros.
    • At the heart of the question here is whether the pension collected by an MEP under the system described above should be taxed as earned income, i.e., it should be treated the same way as the benefits paid to MEP and other representative members (article 17.2.b) personal income tax law), or as capital gains, i.e., such benefits should be considered annuities (article 25.3 personal income tax law).
    • After analysing the legal aspects of the scheme, the Supreme Court correlates it with the payments referred to in article 17.2.b) personal income tax law in terms of the reason for receiving them. However, analysing the source of the payments, the court considers that it would be appropriate for two-thirds of the pension to be taxed as earned income and the remaining third as capital gains.

Corporate Tax

  • National Court Ruling of 11 January 2023. Corporate Tax. Deductibility of directors' remuneration.
    • In this case, the appellant has established in its Articles of Association that 10% of each financial year’s net profits or whatever the legal limit is will go towards directors’ compensation. On its corporate income tax return the appellant deducted the remuneration paid as a deductible expense. However, the Tax Authorities, applying the millimetre theory, which requires the amount to be established in the Articles of Association in a specific or clearly determinable manner, considered that it was a non-deductible expenses since it did not specify the exact type of compensation but merely a quantitative limit.
    • The National Court must determine whether or not the payments are deductible.
    • The National Court rejects the reasoning of the Tax Inspectorate and the Central Economic-Administrative Court, on the understanding that if the compensation paid to the directors is compliant with the law then such compensation constitutes a deductible expense, and the Court considers the millimetre doctrine to be excessively rigid. For these reasons, it considers that the compensation is tax-deductible.

Value Added Tax

  • Binding Query V2664-22 of 29 December 2022. VAT. Hotel and catering services. Ancillary services.
    • The inquiring company is in the hospitality business, more specifically, it operates a restaurant. From time to time, it reserves and rents out certain areas of the restaurant for a separate fee.
    • The question the Tax Directorate must answer is whether the rental of reserved areas of the restaurant can be considered an ancillary service, separate from the standard restaurant service, or whether it is a single complex comprising the hotel and other ancillary services such as rentals, for VAT purposes, taking into account that a separate price is charged.
    • The Tax Directorate determines that the services in question are distinct services with their own independent identity, but cannot be classified as dissociated services as they are not artificially itemised. Consequently, hospitality services should be taxed at a reduced rate of 10%, whilst the rental of reserved spaces should be taxed at the general rate of 21%.
  • Binding Query V2330-22 of 10 November 2022. VAT. Heating and gas. Tax rate.
    • The inquiring company operates in the energy management and efficiency sector serving homeowners’ associations, industry and government buildings. It signs agreements with homeowners’ associations to supply them with energy services.These services consist of purchasing natural gas for boilers in buildings with central heating. Each resident is then invoiced for heating and domestic hot water based on usage.
    • The issue to be decided by the Tax Directorate is the VAT rate that applies to these services, andspecifically whether there has been any change in this rate as a result of the enactment of RD-L 17/2022 of 20 September.
    • The response from the Tax Directorate is that the operations described must be invoiced to the residents at a rate of 21%. The reasoning is that the end consumer contracts a service that is meant to provide heat and hot water, and the supply of domestic hot water is an accessory to the supply of heating which is taxed at the same rate for VAT purposes.

Tax on the Increase in Value of Urban Land (IIVTNU)

  • Supreme Court Order of 18 January 2023. IIVTNU. Effects of unconstitutionality. Judgment date. Publication date.
    • More than a year after the publication of STC 182/2021 of 26 October, which declared that the system for determining the taxable base for the Tax on the Increase in Value of Urban Land (IIVTNU) was unconstitutional, the Supreme Court must now rule on the date on which it came into effect.
    • It will now have to rule on whether the date of the judgment (26 October 2021) or the publication date (25 November 2021) should be used to determine when we are dealing with a consolidated situation and whether it is appropriate to challenge it on that basis.

Tax on Hydrocarbons

  • Supreme Court Ruling of 30 January 2023. Tax on hydrocarbons (IEH).Biogas. European Union Law.
    • The question at issue concerns the reform introduced by Law 15/2012 of 27 December which abolished the exemption provided for in the Electricity Industry Law, with taxpayers having to pay the Tax on Hydrocarbons (IEH) for the production of biogas at cogeneration plants. However, as a result of the CJEU’s Cristal Union Ruling, it was determined that the part of the hydrocarbons used to generate electricity in the cogeneration processes of electrical and thermal energy should be exempt from the IEH.
    • The Supreme Court had to rule on whether the exemption in question is directly applicable and not voluntary for the Member States in the light of the aforementioned CJEU Ruling, or whether it is not since the Member States may derogate from the system of mandatory exemptions from IEH for reasons of environmental policy.
    • The High Court upheld the appeal brought by the appellant company and ruled that Article 14(1)(a) of Directive 2003/96/EC constitutes a direct exemption (not voluntary for Member States) for the direct vertical upstream effect in relation to biogas used to produce electricity.

Other relevant rulings

  • Supreme Court Ruling of 23 January 2023. General Tax Law (LGT). Verification of values. Justification for initiation.
    • The appellant acquired an urban property and settled the Transfer Tax (ITP) accordingly. However, the Tax Authorities took the view that the value declared as the taxable base was not the real value of the property and initiated a process to check the value without providing any justification as to the reason for doing so.
    • The Supreme Court ratifies the settled law in its previous ruling of 23 May 2018 (cassation appeal 4202/2017) according to which the Tax Authorities must justify the reason for an inspection and the reason may not be unsubstantiated assumption that the assigned value is incorrect.However, it adds that the omission of such rationale does not automatically lead to the invalidation of the assessment, but rather that the party seeking its invalidation must prove that the omission is something other than a mere formality.
  • Supreme Court Ruling of 2 February 2023. General Tax Law (LGT). List of tax debtors. Settlements linked to crimes.
    • The case concerns a challenge to the decision of 1 October 2018 of the Director General of the State Tax Administration Agency (AEAT), rejecting the appeal for reconsideration lodged against the Agreement adopted on the basis of Article 95 bis LGT, as a result of which a list of tax debtors, including the appellant, was published on the AEAT’s electronic site.
    • The question at issue is whether or not the tax debts derived from settlements linked to crimes meet the requirements of art. 95 bis.3 LGT for inclusion on the list of debtors.
    • The Supreme Court determined that the settlements issued by the Tax Authorities under article 150.1 and concordant articles of LGT do not meet the legal requirements of article 95 bis LGT for the inclusion of the debtor, in the event of non-payment, on the list of debtors regulated in the aforementioned article. In such cases, only a final criminal conviction for an offence against the Treasury would allow a debtor subject to this type of settlement to be included on the list, regardless of whether or not the debt were suspended.