A company should not be barred from using losses of permanent establishments in other states, when they can no longer be used by the permanent establishments themselves

Court of Justice of the European Union Judgment of June 12, 2018, case C-650/16

The Finnish branch of a Danish company had accumulated losses when it was closed, so its Danish parent company asked to be able to deduct those losses. Under the Danish corporate income tax legislation, however, it is not allowed for the income and losses of their permanent establishments in other member states to be included in the tax bases of companies resident in Denmark, unless the Danish company has elected the scheme of international joint taxation, which had not occurred in the case at issue, for which reason the Danish tax authorities did not allow that deduction. Those losses could have been deducted, however, if the branch had been in Denmark.

The CJEU made the following analysis:

a) The Danish scheme of international joint taxation results in all the companies in a group including their permanent establishments being taxed in Denmark, which means that the income of their permanent establishments situated in other countries is taxed in Denmark, but also that the losses of those establishments may be deducted.

By contrast, the standard scheme allows an exemption for the income of permanent establishments situated in other countries, while simultaneously not allowing the deduction of their losses, whereas the income of permanent establishments in Denmark may be included in the tax base.

Both schemes, therefore, may give rise to advantages or disadvantages according to the circumstances involved, and taxable persons have the freedom to be taxed under one scheme or the other. The requirements laid down to be eligible for international joint taxation are very strict, however. Among others, the election to be taxed under this scheme is made for a term of at least ten years.

It may be inferred therefore that the Danish Corporate Income Tax Law gives rise to a difference in treatment between Danish companies with permanent establishments in Denmark and those having permanent establishments in other member states, which is liable to make exercising their freedom of establishment by setting up permanent establishments in other member states appear less attractive.

b) The objective of the legislation is justified because it is intended to prevent double taxation of profits and double deduction of losses of nonresident permanent establishments, so that every company is taxed in line with its ability to pay tax. Yet the ability to pay tax of a company with nonresident permanent establishments which have definitively incurred losses is affected in the same way as that of a company whose resident permanent establishment has incurred losses. It follows from this that the difference in treatment between one type of company and another concerns situations that are objectively comparable.

c) This difference in treatment cannot be held proportionate in cases where the permanent establishment in another country accumulates losses and is closed. Because in those cases there is no longer any possibility of deducting the losses of the nonresident permanent establishment in the member state in which it is situated and the risk of double deduction of losses no longer exists either.

It must therefore be concluded that the Danish legislation is contrary to the freedom of establishment.

Corporate income tax

It is valid to use premises for the business and hire a worker to be able to claim the reduced rate

Castilla y León High Court. Judgment of March 9, 2018

The company rented premises and hired an employee to carry on its business, which entitled it to claim the reduced corporate income tax rate. Castilla y León High Court held that it is irrelevant whether the taxable person’s objective was precisely to claim the reduced rate, because the truth is the rental and the hiring of an employee took place, and so the requirements to claim that reduced rate were satisfied.

Nonresident income tax

Dividends paid to nonresident collective investment vehicles may not be subject to withholding tax if the same withholding tax does not apply to resident vehicles

Court of Justice of the European Union Judgment of June 21, 2018, case C-480/16

The court examined a case involving collective investment vehicles in transferable securities (UCITS) resident in the United Kingdom and in Luxembourg with investments in Danish companies and offering products to clients resident in Denmark. Distributed dividends on Danish investments were subject to withholding tax in Denmark; whereas UCITS resident in Denmark may be eligible for an exemption, if: (i) they are resident in Denmark and (ii) calculate and report a minimum distribution of dividends.

The CJEU held that this legislation was contrary to the free movement of capital.

Inheritance tax

Inherited property transferred to a third party is liable to tax in the proportion it bears to the whole inheritance

Supreme Court. Judgments of June 5 and 7, 2018

According to the Supreme Court, assets or rights acquired by inheritance which are later sold to a third party not protected by evidence obtained through registration (in the case of property able to be registered) or who fails to substantiate that the acquisition was made with good faith or just title in an establishment open to the public (in the case of movable or immovable property), are subject to inheritance tax in the proportion that the audited value of that property and those rights bear to the inheritance received by the transferor.


The rental of a property by a holding company to its subsidiary is an economic activity giving entitlement to the deduction of VAT

Court of Justice of the European Union Judgment of July 5, 2018, case C320/17

In relation to the deduction of the input VAT paid by holding companies, the CJEU explained in this judgment that:

a) The rental of a property by a holding company to its subsidiary entails “involvement in the management” of the subsidiary, in other words, an economic activity that entitles the company to deduct VAT on the expenditure incurred by the holding company to acquire its subsidiary.

b) If the holding company has more than one subsidiary but involves itself in the management of only some of those subsidiaries, it does not mean that it carries on an economic activity with regard to the others. As a result, the VAT paid in respect of the expenditure relating to the acquisition of securities is only partially deductible, in accordance with the method of calculation defined by each member state which objectively reflects the part of the input expenditure actually to be attributed to economic activity.

Transfer and stamp tax

The exemption for housing under an autonomous community’s official protection system must satisfy the central government’s parameters for officially protected housing

Supreme Court. Judgment of May 22, 2018

The Supreme Court concluded that for housing under an autonomous community official protection system to qualify for the exemption in the law on transfer and stamp tax, the parameters to be met are those defined in the central government legislation determining the characteristics of officially protected housing (VPO) because otherwise the autonomous community legislation would be allowed to restrict or broaden the tax benefits granted by the central government legislation.

Tax on increase in urban land value (“IIVTNU”)

The tax must be paid if an increase in land value has taken place

Supreme Court. Judgment of July 9, 2018

As reported in our Tax Alert 12-2018, the Supreme Tribunal recently concluded that the tax on increase in urban land value must be paid on transfers of properties in which an increase in value has occurred.

See our Alert for further details (http://www.garrigues.com/es_ES/noticia/el-supremo-determina-que-si-hay-incremento-de-valor-de-los-terrenos-urbanos-procede-el-pago).

Tax procedure

On the protection of legitimate expectations in relation to a change of interpretation by the tax authorities

Supreme Court. Judgment of June 13, 2008

From a given date, the tax authorities started charging transfer tax on purchases of articles made of gold and other metals by private companies even though no change had occurred in the legislation on this subject. At issue was whether this is at odds with the principle of legitimate expectations, especially since, under their new interpretation, the tax authorities issue assessments in relation to earlier transactions in non-statute barred years.

The Supreme Court's reply was negative. The court held that the principle of legitimate expectations does not apply if there are no acts or external signs conclusive enough to convince the taxpayer reasonably of the tax authorities’ unambiguous intention in the direction concerned. So, the fact that the same type of adjustment had not been made in the past does not imply that the tax authorities interpreted that those transactions were not subject to transfer and stamp tax, nor does it amount therefore to estoppel barring the authorities from charging the tax in respect of earlier non-statute barred periods.

Tax procedure

A person held liable for tax has the right to apply for an expert appraisal made at the taxpayer’s instance

Supreme Court. Judgment of May 22, 2018

The Supreme Court has acknowledged that an expert appraisal may be made at the taxpayer’s instance to refute both the audit of reported values that has served as the basis for a tax assessment, and any that may occur in the context of a procedure for declaration of liability for the payment of tax.

For this reason, the tax authorities must inform of that option in the decision declaring liability. So, although the absence of information in this respect does not affect the validity of the decision, it does stop the clock on the statutory time limit for applying for an expert appraisal made at the taxpayer’s instance.