Tax Newsletter November 22

Tax Newsletter

November 22

Daniel Tarroja, Tax Partner
Tax Newsletter November 22

Value Added Tax (VAT)

  • Supreme Court ruling of 31 October 2022.. VAT. Deferral of payment. Penalty. European Union law.
    • The question of interest to the Court on appeal is whether European Union law, in particular VAT legislation, and the constitutional principles governing the power to impose penalties in the field of taxation preclude the imposition of a penalty which punishes the deferred reporting of VAT owed to a subsequent quarter, in an amount greater than that which the taxpayer would pay as a late filing fee without a prior request for payment when, as in this case, the application of such a surcharge is not possible.
    • The High Court finds that neither European Union law, in particular VAT legislation and the principles of neutrality and proportionality, nor the constitutional principles governing the power to impose penalties in the field of taxation are infringed by the possibility of imposing a penalty, as defined in Article 191.6 General Tax Law, which punishes the postponement of VAT reporting to a subsequent quarter, in contravention of the requirements of Article 27. 4 General Tax Law, even when the effect of applying the penalty results in a fine in excess of what the taxpayer would have paid as a late filing fee without a prior request for payment when, in cases such as this one, it is not possible to apply the surcharge due to the taxable person's own actions in failing to abide by the legal requirements.

Personal Income Tax (IRPF)

  • Ruling of the Central Economic-Administrative Court (TEAC) of 22 October 2022. Personal income tax. Exemptions. Compensation for termination of special employment relationship. Senior management staff.
    • The taxpayer was issued a Provisional settlement agreement for personal income tax withholdings/payments on account, which resulted in a tax debt of approximately 180,000 euros. This adjustment is due to the failure to withhold and pay income tax on the severance pay received by the taxpayer, which the tax inspectors argued was not exempt since the employment relationship between the taxpayer and the employer was a special senior management relationship. In response, the taxpayer lodged an economic-administrative appeal with the TEAC, essentially arguing that a precedent was set with the then Sales Director of the company, which both the Labour Court and the Labour Division of the Catalonia Supreme Court considered to be an ordinary employment relationship, both positions having similar powers. Therefore, it must be considered an ordinary employment relationship, especially since the tax inspectors’ explanation is based on mere conjecture or erroneous criteria.
    • The TEAC rejects the economic-administrative appeal, finding that there was indeed a special employment relationship between the appellant and the company. Moreover, the court finds that since the regulations governing senior management contracts do not provide for any minimum compensation if the senior management employment contract is terminated due to a substantial change in working conditions (article 12 of Royal Decree 1382/1985), there is no exemption from personal income tax in these cases.
  • Binding Query V1899-22 of 1 September 2022. Personal income tax. Deduction for the purchase of a primary residence. Moving mortgage loan to another bank.
    • The petitioner has been paying on a mortgage taken out in 2011 for the purchase of a home, taking tax deductions for the investment in a primary residence. He intends to take out a new mortgage loan with a different bank in 2022, with the same outstanding balance of principal as the current loan. His question is whether he will still be eligible for the same tax deduction he has been taking on the current loan once he refinances.
    • The response of the Tax Directorate (DGT) is that if the mortgage is refinanced without increasing the outstanding loan principal, it will not affect the right to continue taking the pertinent tax deductions. Considering that he is not the only borrower on the loan, it should be noted that for a mortgage taken out to finance the purchase of a primary residence, the right to take a deduction for investment in a primary residence depends on the proportional amounts paid by the taxpayer on the loan principal and the proportional part of that amount used to finance the indivisible interest in the fractional ownership of the acquired property.
  • Binding Query V1977-22 of 16 September 2022. Personal income tax. Succession pact. Question regarding the acquisition value of a property acquired under a succession pact.
    • The petitioner indicates that a property was transferred to her by her parents in 2019 under a succession agreement. In view of the possible sale of the property in 2022, she asks about the application of the new wording of Article 36 of Law 35/2006.
    • The new wording of article 36.2 personal income tax law (LIRPF) only applies to properties sold after the effective date of this law that were acquired for a consideration on a causa mortis basis under succession agreements or contracts with present effects. The DGT determines the acquisition value of the property for the purpose of calculating the capital gain or loss on the sale by the petitioner (the heir) if this take place in 2022, which would be sooner than five years after the succession agreement was signed (2019, according to the query) and without the originators (parents) being deceased. The heir assumes the position of the originators (the parents) in terms of the acquisition value and date of the property when this value is lower than it would be if the rules of Inheritance and Gift Tax were applied when the ownership was transferred under the succession agreement.

Other rulings

  • Supreme Court ruling of 14 October 2022. General Tax Law. Joint and several liability. Dies a quo of the statute of limitations.
    • The question at the heart of the appeal is to determine, based on Article 67.2 of the General Tax Law 58/2003, the dies a quo of the statute of limitations on the administration's power to demand payment of tax debts from jointly and severally liable parties, when the transfer or concealment took place prior to the settlement of the principal debtor’s tax debt. From the perspective of the court’s objective interest in forming case-law, the purpose of this appeal is to determine how to interpret article 67.2 LGT, i.e., the dies a quo of the statute of limitations on the Administration's power to demand payment of tax debts from jointly and severally liable parties under article 42.2.a) of the law in those cases where, like the one under examination, the transfer or concealment actions took place prior to the settlement of the principal debtor’s tax debt.
    • The Supreme Court finds that the dies a quo of the statute of limitations on the Administration's power to demand payment of tax debts from jointly and severally liable parties who are involved in legal actions pursuant to article 42.2 LGT - legal expression, that of demanding payment, which includes the period for declaring joint and several liability - begins on the date when the events forming the basis for such liability occur, that is, from the time when the transfer or concealment actions took place, irrespective of the date of the tax return relating to the principal obligation to which the latter is subordinated.
  • National Court ruling of 6 October 2022. Non-resident Income Tax. Withholdings. Free movement of capital. Foreign investment funds.
    • This appeal was brought in connection with the TEAC’s rejection of a claim filed against provisional settlements issued in response to requests for refunds of non-resident tax withholdings applied in 2009 and 2010. It is based on the fact that the taxation of the dividends earned by the appellant company on shareholdings in certain companies resident in Spain has resulted in a breach of European Union law in violation of Article 63.1 of the Treaty on the Functioning of the European Union (TFEU) and the principle of the free movement of capital enshrined therein. Whereas the same types of legal entities resident in Spain (IIC) are taxed at 1%, the appellant, a Regulated Investment Company (RIC) resident in the USA, which is subject to a 15% withholding tax on the dividends earned, is also subject to this withholding tax, which is the definitive tax debt since there is no mechanism in the Law to equate its tax status with that of the enterprises resident in Spain.
    • The appeal is upheld on the grounds that the system is contrary to the free movement of capital. It is based on an identical judgment of the Supreme Court of 13 July 2020 (Rec. 529/2015), which finds that the requirements to be met by investment funds resident in the United States in order for their income to receive the same tax treatment as those resident in Spain and harmonised funds of the European Union must be set in light of the requirements of Directive 2009/65/EC on collective investment undertakings in negotiable securities or, failing that, Directive 85/611/EEC. It is also noted that the Double Taxation Avoidance Agreement between Spain and the United States would have allowed the Spanish authorities to gather the necessary information. Therefore, on the basis of the documents submitted by the claimant, the court finds that it is entitled to a refund.
  • Binding Query V0879-22 of 25 April 2022. Wealth tax. Balearic Islands. Separation of assets. Acquisition of primary residence. Calculation and declaration.
    • The petitioner and his spouse, married under a separate property arrangement regulated by the civil law of the Balearic Islands, purchased a home together which is their primary residence. The petitioner contributed more money to the purchase than his spouse in keeping with the civil law of the Balearic Islands, which stipulates that each spouse contributes to family expenses in proportion to his or her financial resources. Moreover, one of the factors for determining the division of wealth between spouses is the work devoted to the family. He asks: (1) whether the difference in the contributions made by the spouses towards the purchase of the primary residence should be reported on the Wealth Tax return; (2) how the compensation between the spouses for dedication to the family is reflected on the Wealth Tax return.
    • According to the information in the petitioner’s letter, the difference in the spouses’ financial contributions towards the purchase of the primary residence has its origin in the separate marital property arrangement regulated in the civil law of the Balearic Islands, which applies to the petitioner's marriage and stipulates that each spouse contributes to the family expenses in proportion to their financial resources. Therefore, in principle, it seems that this difference in contributions is not owing to a private loan agreement between the spouses in which the petitioner loaned his spouse the amount needed for the purchase in order to equalise the financial contributions of the two, but rather that the difference in the financial contributions is based on the regulation of the marital property arrangement that applies to them. Therefore, no credit right arises for the petitioner to which an economic value can be assigned; hence, it will have no effect on his Wealth Tax return. Regarding the question of compensation between spouses for dedication to the family, such compensation constitutes an increase in the recipient's assets, which will be reported on the Wealth Tax return depending on the assets that materialise as a result. On the other hand, for the person that is obligated to pay such compensation it will mean a reduction of their net assets which will be reflected on their tax return, as the assets that were transferred as compensation are no longer part of the taxpayer’s net worth on the accrual date of the tax.
  • Binding Query V2097-22 of 30 September 2022.Corporate tax. Vehicle expenses. Use by partners.
    • Entity A needs to buy or lease at least two vehicles for the daily management of the company by the partners/shareholders. The question is whether entity A can deduct the cost of acquiring these vehicles as an operating expense.
    • The DGT replies that based on the petitioner’s letter and to the extent that the vehicles in question are used for the company’s business activities, both the depreciation costs if the vehicles are purchased (taking into account the effective depreciation in the terms indicated in article 12 of LIS) and the leasing costs if they are leased are tax deductible for Corporate Tax purposes, provided that all legally established conditions are met in terms of recognition, accrual-based allocation and supporting documentation, and as long as they are not considered non-deductible expenses for tax purposes due to the application of any specific provision established in LIS.