Tax Newsletter

June 23

Daniel Tarroja, Tax Partner

Corporate Tax (IS)
- Ruling of the High Court of Justice of Madrid of 1 March 2023. Corporate Tax. Simulation. Shareholder-company transactions.
  - The question in this case is whether or not simulation is involved in a prototypical case of adjustment in transactions between a company and a shareholder.More specifically, the High Court of Justice of Madrid is asked to analyse whether simulation was used in the possible artificial division of the appellant’s business activity.
  - The High Court of Justice of Madrid concludes that there is no simulation, since the reality of the transactions described by the inspectors has been proven and it is understood that they were actually carried out by the shareholder using the resources provided by the company.This ruling is important because it considers that the shareholder-company structure must be analysed from the perspective of related-party transactions, not simulation.
  - Consequently, for the reasons indicated above, the Court reversed the contested settlements as well as the penalties on the grounds that they were unlawful.
- Ruling of the High Court of Justice of Catalonia of 9 March 2023. Corporate Tax. Valuation of related party transactions. Shareholder-company. In this case, the High Court of Justice of Catalonia analyses the valuation of related-party transactions between a football players' agent and a company in which the agent owns a 44.99% stake and is also the CEO.
  - The Court views this as a related-party transaction and as such the use of the comparable uncontrolled transaction (CUP) method by the tax inspectors is correct.Specifically, it is understood that the value assigned by the company to those same transactions with independent third parties can be used as a reference for the market valuation of the transactions.
Personal Income Tax (IRPF)
- Supreme Court Ruling of 23 May 2023. Personal Income Tax. Earned income. Investment income.
  - The issue in this case is whether the amounts received by former members of the European Union Parliament from the European Parliament’s voluntary supplemental pension scheme should be taxed as earned income under article 17.2.b) of the personal income tax law (LIRPF) or as investment income according to article 25.3 of the same law.
  - The Supreme Court establishes doctrine by determining that the amounts received by former members of the European Union Parliament from the European Parliament’s voluntary supplemental pension scheme should be taxed as follows: two-thirds as earned income under article 17.2.b) of the personal income tax law (LIRPF) and one-third as investment income according to article 25.3.a.2 of the same law.
- Ruling of the Central Economic-Administrative Court (TEAC) of 29 May 2023. Personal income tax. Capital gains. Taxability. Late interest paid by the tax authorities on refunds of overpaid taxes. Principle of protection of legitimate expectations.
- Ruling of the Supreme Court of 30 May 2023. Business Tax. State of alarm. Shutdown.
  - The issue in this case is whether the temporary suspension or limitation of operations in a certain sector ordered by the decree declaring the state of alarm, in this case Royal Decree 463/2020 of 14 March, can be interpreted as meaning that the taxable event for business tax did not occur during the period in which this measure was in force and hence no business tax is due for financial year 2020.
  - The Supreme Court held that the suspension of operations and the closure of establishments cannot be construed to mean that the taxable event did not occur during the period of inactivity, given the dates and the prior accrual of the tax.The Court also ruled that it is appropriate to apply the rules for industrial suspensions found in Legislative Royal Decree 1175/1990, which reduces the tax liability in proportion to the time during which the trade, industry or activity was shut down.Finally, it is not necessary to provide proof that a business was suspended or closed, or to inform the Administration of such closure or inactivity, as both circumstances are derived directly from the law which imposes them as a consequence of the public health measures adopted. For hotel and catering activities in particular, the only proof that is required is that no home delivery was available, which is not disputed here.
  - The TEAC settles the extraordinary appeal for unification of criteria and determines that the doctrine established in the Supreme Court Ruling of 3 December 2020 (rec. cas. 7763/2019) applies to the late interest paid to the taxpayer by any tax authority at the state, autonomous or local level as a consequence of a refund of overpaid taxes.
  - According to the Supreme Court ruling of 12 January 2023 (appeal 2059/2020), late interest paid to the taxpayer by any tax authority at the state, regional or local level as a result of a refund of overpaid tax is subject to and not exempt from personal income tax, and must be taxed as a capital gain to be included in general income.
Temporary Solidarity Tax on Large Fortunes (ITSGF)
- Binding Query V0424-23 of 24 February 2023. Temporary Solidarity Tax on Large Fortunes (ITSGF). Taxation on Spanish-source income.
  - The petitioner asks whether taxpayers under the impatriate regime (article 93 LIRPF) who are subject to the Temporary Solidarity Tax on Large Fortunes (ITSGF) can also be taxed under the latter on Spanish-source income, given the complementary nature of this tax with respect to the Wealth Tax.
  - The Tax Directorate’s response is that as a result of the explicit reference made in ITSGF to the Wealth Tax regulations, non-resident taxpayers classified as impatriates according to article 93 LIRPF and who are therefore subject to Non-resident Income Tax, are liable for the payment of Wealth Tax on Spanish-source income as well as the Temporary Solidarity Tax on Large Fortunes for as long as they file their taxes as non-residents.
Other decisions of interest
- Ruling of the Court of Justice of the European Union of 8 June 2023. Right to interest on undue income.
  - The question concerns whether legislation of a Member State which limits the right to receive interest to the period up to the 30^th day after the publication of the Court of Justice ruling in the Official Journal of the European Union is to be regarded as contrary to EU law.
  - The CJEU concludes that national legislation which temporarily limits the period for accrual of interest on the undue payment due to the taxpayer infringes EU law. The principle of effectiveness, in conjunction with the principle of sincere cooperation, must be interpreted as precluding a piece of national legislation which, when a request for a refund of an overpayment of tax is submitted more than 30 days after the publication in the Official Journal of the European Union of a ruling of the Court of Justice from which the finding that the tax at issue is contrary to EU law is derived, limits the running of the interest on the overpayment due to the taxable person concerned to the thirtieth day following that publication, or even excludes interest entirely in a situation where that overpayment was incurred by the taxable person after that thirtieth day.
    Consequently, it is up to the domestic legislation of each Member State to regulate the conditions for the payment of such interest in cases of refunds of tax collected in breach of European Union law. This regulation must comply with the principles of equivalence and effectiveness, ensuring that it is neither impossible nor excessively difficult to exercise the rights conferred by European Union law.
    
    However, for taxpayers who did not appeal in a timely manner, it is possible to request a refund of overpaid tax using the procedure for requesting refunds of undue tax payments (article 221.1d) General Tax Law) regulated in article 89 of Legislative Royal Decree 2/2004.