Tax Newsletter

Case law:

Personal Income Tax (PIT)

• Supreme Court ruling of 22 July 2024. Personal Income Tax. Conflict of tax residence.
  • The Supreme Court has resolved the appeal for reversal filed against the ruling by the High Court of the Valencian Community relating to Personal Income Tax for the 2014 tax year. The first question to be considered by the Court is whether a judicial or administrative body may disregard the content of a tax residence certificate issued by the tax authorities of a country that has concluded a Double Taxation Agreement (DTA) with Spain, where such certificate is issued for the purposes of the Agreement. Therefore, the High Court must clarify whether it is possible to reject the content of a residence certificate issued by the tax authorities of the other State pursuant to the DTA or whether the validity of such certificate must be presumed by virtue of the conclusion of the DTA. The second question concerns whether it is possible for a State signatory to a DTA to unilaterally examine the existence of a conflict of residence and, if so, whether it must apply the specific rules set out in the DTA for such cases. Specifically, it concerns whether in the event of a conflict of residence, it is necessary to apply the rules governing its resolution set out in the DTA by interpreting such rules separately from the corresponding national legal provisions and, more specifically, whether the rule set out in Article 4.2 of the DTA concerning the "centre of vital interests", is comparable to the concept of "centre of economic interests" set out in Article 9.1.b) of the Personal Income Tax Law.
  • Regarding the first question, the High Court has established as case law that double tax residence dispute cases must be resolved in accordance with the rules set out in the DTA on the basis of the validity of the tax residence certificate issued by the State and the concurrence of the condition of tax residence in the other State. As regards the second question, the High Court states that, in the event of a situation of conflict of residence, the rules set out in the DTA apply, taking into account the "tie-breaker rule" set out in Article 4.2 of the DTA signed between the two countries, thereby interpreting the expression "the main core or the basis of his/her activities or economic interests" in terms of the set of activities and economic interests of the person concerned and considering any relevant ties for identifying his/her activities and economic interests. Finally, the High Court states that the rule provided for in Article 4.2 of the DTA signed between Spain and Great Britain, consisting of the determination of the "centre of vital interests", is broader, albeit not contrary to the concept of "core economic interests" contained in Article 9.1.b) of the Personal Income Tax Law.
• Supreme Court ruling of 22 July 2024. Personal Income Tax. Tax residence.
  • The Supreme Court has ruled on the appeal for reversal filed against the ruling of the Supreme Court of Catalonia, which determined that the appellant married couple's centre of economic interests was in Spain, despite the fact that both spouses had certificates of residence in the United Kingdom for the purposes of the DTA signed between the two countries. The question brought before the Supreme Court is to determine whether, in a tax residence verification procedure, a judicial or administrative body may disregard a tax residence certificate issued by the tax authorities of a country that has signed an agreement with Spain on the basis that the country is not taxed on worldwide income, since it is subject to a tax regime that limits taxation to income obtained only in that State. The Court must also determine how the verification body should proceed in cases where a residence conflict is detected.
  • The High Court asserts that, in this case, the Administration has not denied the validity and scope of the tax residence certificate, but instead, in accordance with the rules set out in the DTA, the married couple is considered to be a tax resident in both countries. Therefore, in this case, the tie-breaker rules apply in favour of residence in Spain. Accordingly, the criterion set out in section a) of Article 9.1 of the Personal Income Tax Law (residence for more than 183 days in Spanish territory) is not a determining factor since the tax authorities invoke the criterion set out in section b) of the same article, which establishes tax residence in Spain when: "b) The main core or the basis of his/her activities or economic interests, directly or indirectly, are based in Spain". The assessment made by the Administration and confirmed by the ruling under appeal regarding the set of activities and economic interests determines that the closest economic ties of the taxpayers are in Spain, where the main core and the basis of their activities and economic interests are located, meaning that the residence criterion established in Article 9.1.b) of the Personal Income Tax Law is met. In conclusion, the Supreme Court emphasises that, in this case, the criterion relating to personal ties does not supersede the criterion relating to economic activities and interests, but rather, those that are relevant in Spain are taken into consideration.
• Supreme Court ruling of 24 July 2024.Tax on hydrocarbons.
  • The Supreme Court has ruled on the appeal for reversal brought by the Provincial Council of Bizkaia against the ruling of the High Court of Justice of the Basque Country. The disputed matter concerns the application of the exemption from the Special Tax on Hydrocarbons (IEH) regulated in Article 14(1)(a) of Council Directive 2003/96/EC on natural gas intended for the production of electricity or for the cogeneration of electricity and heat or for self-consumption in the installations where they are generated. Specifically, it must determine whether, based on the ruling given by the CJEU on 7 March 2018, Case C-31/17 (Cristal Union v Ministre de l'Économie et des Finances), Article 14(1)(a) of Directive 2003/96/EC constitutes a direct exemption (not voluntary for Member States) or, on the contrary, whether such direct effect is not absolute and permits Member States to make exceptions to the mandatory exemption, in relation to natural gas, a fuel of fossil origin, intended for the production of electricity or the cogeneration of electricity and heat or for self-consumption in the installations where it is generated "for environmental policy reasons".
  • The High Court has dismissed the appeal and, in response to the question raised, has stated that Article 14(1)(a) of Directive 2003/96/EC constitutes a direct and non-voluntary exemption for Member States and that, in this case, the lifting of the compulsory exemption was not based on environmental policy grounds. Consequently, having established the non-conformity of the national rule with European law, the national rule must be disapplied, and the mandatory exemption must be applied with respect to the natural gas that was subject to taxation for the production of electricity and heat.

Administrative Doctrine:

Value Added Tax (VAT)

• Binding Query V0564-24 of 9 April 2024. VAT. Development.
  • The petitioner is a natural person who is going to undertake the development for the construction of his future primary residence. He initially started the construction with a single builder but subsequently hired several contractors for each of the remaining aspects of the construction project. For the plumbing and heating, the contractor is applying 21% VAT. However, the question is raised as to whether the reduced rate of 10% should be applied, as this is a contract between a developer and a contractor for the construction of a house. Furthermore, he states that the cost of labour for the plumber exceeds 60% of the total cost of the construction project, as the materials were provided by the first builder.
  • The Directorate-General for Taxation (DGT) has responded to the query, stating that the tax rate applicable to these self-development construction projects will be the reduced tax rate of 10%. However, the petitioner shall not be considered a businessman for VAT purposes since the property is not intended for future sale, meaning that the tax payments for the self-development cannot be deducted.
• Binding Query V0566-24 of 9 April 2024. VAT. Subsidies.
  • The petitioner is a company that provides urban passenger transport services under an administrative concession and receives a subsidy from the local council to offset the operating deficit generated. The query submitted to the DGT concerns whether such subsidy is subject to VAT.
  • The DGT has responded to the query, determining that the subsidy in question is not considered to be price-linked or a consideration for any transaction and, therefore, is not subject to VAT.
• Binding Query V0570-24 of 9 April 2024. VAT. Tax rate.
  • The petitioner is a company that organises monthly cultural and commercial events, renting spaces to artists to exhibit their creations, as well as to other entrepreneurs to offer their "street food" businesses. Visitors purchase a ticket to attend the events, where the merchant also offers live music, hiring the musicians directly. The products offered are not included in the admission ticket. The enquiry submitted to the DGT concerns the VAT rate applicable to the sale of tickets for admission to the event and to the rental of the spaces.
  • The DGT has responded to the query, stating that the reduced tax rate of 10% provided for in Article 91.1.2.9 of the VAT Law applies as the services are provided directly by the organisers of events and trade fairs, both to the participants (exhibitors) and subcontracted third parties.
• Binding Query V0581-24 of 9 April 2024. VAT. Exemption.
  • The petitioner is a natural person who is going to start a self-employed business as a trainer of candidates for civil service positions. The question raised is whether the activity carried out by the taxpayer is exempt from VAT.
  • The DGT has responded to the query, determining that, pursuant to the provisions of Articles 5 and 4(1) of the VAT Law, the petitioner has the status of business person or professional for the purposes of VAT. However, Article 20.1.10 stipulates that the provision of training services carried out by the petitioner is exempt if the subject taught is included in any syllabus of any level or grade of the Spanish education system.

Personal Income Tax (PIT)

• Binding Query V0554-24 of 9 April 2024. Personal Income Tax. Tax residence.
  • The petitioner is a natural person who lives in Ecuador for more than 183 days a year. However, his permanent residence is in Spain and not in Ecuador. He is married and has children who live with him. Although he earns income from his work in Ecuador, the main core or basis of his economic activities or interests, consisting of investments and business assets, is in Spain. The query submitted to the DGT concerns the petitioner's tax residence.
  • The DGT has responded to the query, stating that if a person can be considered a tax resident in both Spain and Ecuador at the same time, in accordance with the national laws of the two countries, there would be a conflict of residence between the two States. In this case, this conflict must be resolved by referring to Article 4.2 of the DTA between Spain and Ecuador, which stipulates as the first rule that the person shall be a tax resident of the State where he/she has a permanent residence, which, in this case, is Spain.