Corporate income tax

Meaning of “final loss” defined for offsetting losses generated by the subsidiaries of other member states

Court of Justice of the European Union. Judgments of June 19, 2019, cases C-607/17 and C-608/17

In a judgment rendered on December 13, 2005 (case C-446/03, Marks & Spencer), the Court of Justice of the European Union (CJEU) held that it is justified to restrict a company’s right to deduct a foreign subsidiary's losses (even if it is allowed to deduct a resident subsidiary’s loses) by the need to preserve a balanced allocation of taxing powers between member states and prevent the risk of losses being used twice. However, the CJEU specified that it is disproportionate for the parent company's state of residence to disallow this option when the non-resident subsidiary’s losses are “final”.

In two new judgments rendered on June 19, 2019, the CJEU has defined the term “final loss”. The following cases were referred to the CJEU:

  1. Case C-608/17, Holmen AB: in this judgment the Court examined a case in which a Swedish company has various Spanish subsidiaries that file joint tax returns in Spain. Insofar as one of the subsidiaries had accumulated a significant amount in losses, a doubt had arisen as to whether the Swedish parent company could liquidate the Spanish subsidiaries and offset the losses generated in Spain with the income obtained in Sweden.

The following points need to be considered:

  • Spanish law disallows a transfer of losses in the year of liquidation of a company.
  • Swedish law allows a company to offset the losses of a non-resident subsidiary that is liquidated on condition that the losses are final (within the meaning determined in the Marks & Spencer case) and the parent company does not carry on any activity in the subsidiary’s state in the year of its liquidation.

In this context, it was referred to the CJEU whether the fact that Spanish law prevents the transfer of the losses in the year of liquidation allows them to be treated as final in Sweden.

The CJEU concluded that this fact is not decisive for determining the finality of the losses, unless the Swedish parent company demonstrates that it is impossible for it to deduct those losses by means of a sale of the loss-making company, for example, which will ensure that the losses are taken into account by a third party for future periods. It is irrelevant for these purposes whether a portion of the losses might not have been able to be deducted from the period income of the subsidiary that generated the losses or from another entity in the same group.

Moreover, the CJEU clarified that if the Spanish subsidiaries are not owned directly by the Swedish parent company, restricting the transfer of losses to the parent company would be justified (even if the requirements for them to be treated as final are satisfied), because the group could be seeking strategies to optimize tax rates which could jeopardize a balanced allocation of taxing powers between member states.

      2. Case C-607/17, Memira Holding AB: in this second judgment the Court examined whether a Swedish company                  could deduct the losses generated by its German subsidiary in a scenario where that parent company was                          considering absorbing its subsidiary with dissolution without liquidation of the German subsidiary.

It must be taken into account here that German legislation does not allow the transfer of losses between companies subject to German corporate income tax in the event of a merger. Swedish law, by contrast, does allow those losses to be transferred in the event of a merger.

In this context, the issue referred to the CJEU was whether the losses generated by the German company may be treated as final and therefore may be offset by the Swedish parent company to avoid a restriction on freedom of establishment.

The CJEU concluded, once again, that the losses generated by the German subsidiary are not final, unless the Swedish parent company demonstrates that it is impossible to deduct those losses by means of a sale of the loss-making subsidiary, for example.

 

Corporate income tax

A waiver of preemptive subscription rights for no consideration entails the obtaining of income

National Appellate Court. Judgment of March 28, 2019

A limited liability company was set up to be used as an investment vehicle. Its two members (company A and company B) later signed an investment agreement with a potential shareholder (C), an individual, to whom they proposed investing in that investment vehicle by contributing capital including additional paid-in capital. For this capital increase to be performed, both shareholders (A and B) partially waived their preemptive subscription rights. Later further capital increases were performed and subscribed by the three shareholders (A, B and C), which entailed a waiver of subscription rights by some in favor of others.

The auditors reviewed the tax liability of shareholder A and concluded, as was later confirmed by TEAC (Central Economic-Administrative Tribunal) and the National Appellate Court, that an examination of the transaction as a whole shows that in a short space of time shareholder A (an entity) had waived its own subscription rights to benefit shareholder C (an individual) and had acquired other subscription rights from shareholder C, all for no consideration.

The National Appellate Court concluded in this respect that:

  1. Preemptive subscription rights are transferable rights linked to ownership of an interest and have economic content. The purpose of these rights is to protect the shareholder from the loss arising for that shareholder from a capital increase subscribed by a third party.
  2. A waiver of rights of subscription to shares to benefit an entity and an acquisition from that company of the same type of rights for no consideration by an entity are transactions subject to corporate income tax under article 15.3 of the Revised Corporate Income Tax Law (article 17.4 of the current Corporate Income Tax Law). According to that legislation, assets transferred and acquired for no consideration must be recognized at their normal market value.
  3. This implies that in a transfer for no consideration of subscription rights the difference between the normal market value of the transferred elements and their carrying amount must be included in the tax base; and that in an acquisition of the same type of rights the normal market value of the acquired element must be included. In this case, however, after examining the whole transaction, because some subscription rights are waived and others are received, all for no consideration, the net increase in the tax must be calculated by reference to the difference between the market value of the received rights and the market value of the waived rights (which had no carrying amount for accounting purposes).

 

Personal income tax

A taxpayer may prove full use of the vehicle in their economic activities

Supreme Court. Judgment of June 13, 2019

In a recent judgment, the Supreme Court gave its view on cases in which the use of vehicles may be treated as taking place in economic activities for personal income tax purposes even if they are also used for private needs.

Article 29.2 of the Personal Income Tax Law allows partial use of assets in economic activities, but adds that “partial use shall not be allowed under any circumstances for indivisible balance sheet items”; and authorizes the Personal Income Tax Regulations to determine the cases for treating use of the assets as taking place in economic activities because their use for private needs is ancillary and clearly insignificant.

To implement these provisions in the law, article 22.4 of the Personal Income Tax Regulations provides:

  1. That use of the assets must be deemed to take place for private needs in an ancillary and clearly insignificant manner where private use is made of them only on nonworking days or in nonworking hours in which the performance of the taxpayer’s activity is not interrupted.
  2. That, however, this category does not include saloon cars and their trailers, mopeds, motorcycles, aircraft or sports or recreational vessels (with certain exceptions).

The Supreme Court concluded in this judgment that the above article of the Personal Income Tax Regulations is not illegal because it only clarifies the rule in article 29.2 of the law.

In other words, because the vehicles mentioned are indivisible assets, what the regulations do is establish a presumption that for these assets private use cannot be distinguished from professional use. The Court stressed, however, that it is a rebuttable presumption, although it is very difficult to obtain this type of proof.

 

Taxes on advertising and other sectoral taxes

The establishment of a progressive system does not amount to prohibited state aid

General Court of the European Union. Judgment of June 27, 2019

In a recent judgment, the General Court of the European Union examined the consistency with EU law of a Hungarian tax on advertising which entered into force in 2014, with the following notable features:

  1. The taxable person is the person distributing the advertising (newspapers, audiovisual media, etc.) not the advertisers.
  2. The taxable amount is the net revenue (turnover) in a year generated from distributing advertising.
  3. To determine the tax liability, progressive rates were put in place ranging between 0% and 50%, by reference to the taxable amount.
  4. Lastly, any taxable persons who in 2013 recorded zero income before tax or a loss before tax may deduct from the taxable amount for 2014 50% of the losses from prior losses.

In this context, the European Commission (EC) declared the existence of state aid prohibited by article 108 of the TFEU, by holding that:

  1. The progressive tax rates determined a difference between companies with high advertising revenues and companies with low advertising revenues. In other words, according to the EC a selective advantage was granted to the latter by reason of their size.
  2. The ability to deduct 50% of their losses for companies that did not record income in 2013 also granted a selective advantage.

Against the EC’s decision, Hungary lodged an appeal with the General Court of the European Union, which has upheld the appeal and set aside the decision. The General Court's conclusion was based on the fact that a progressive system may be included in these tax arrangements, which, in principle, do not have to be considered discriminatory for the other companies in the sector. According to the court, the lawmaker’s intention to tax an activity only after it reaches a given size is lawful. As a matter of fact, according to the court, when a company reaches a certain level there is already a selective advantage because it may reasonably be presumed that companies with higher turnovers may have, thanks to economies of scale, proportionately lower costs than companies with lower turnovers.

Exactly the same findings were described by Juliane Kokoda, Advocate General in case c-75/18, examining the consistency with EU law of a turnover-based tax in Cyprus on telecommunications for companies, in her opinion delivered on June 13, 2019. Particularly relevant are the references in this opinion to the new digital services tax (widely known as the Google tax) proposed by the EC, which is also based on companies’ turnovers. Specifically, the Advocate General criticizes the EC for arguing that there is no direct relationship between turnover and a company’s financial strength in the case of certain sectoral taxes, and yet she proposes a digital services tax that has an almost identical legal definition.

 

VAT

The activities of members of a foundation’s oversight board are not subject to VAT

Court of Justice of the European Union. Judgment of June 13, 2019

In a recent judgement, the CJEU examined the VAT chargeable on the services provided by a member of a foundation’s oversight board.

The main powers of these types of boards, acting as collective bodies, are: (I) appointing, suspending and removing members of the foundation’s managing body and determining the terms and conditions of their employment, (ii) staying enforcement of the managing body’s decisions, (iii) advising that managing body, (iv) approving the financial statements, and (v) appointing, suspending and removing the oversight board's own members and determining their fixed compensation.

In the CJEU’s opinion, the members of the oversight board do not carry on an independent economic activity because (I) even though they are not connected with and subordinate to the foundation’s managing body under a hierarchical relationship, (ii) and are not connected with the oversight board either under the same type of relationship in relation to the performance of their activities as members of that board, they do no act on their own behalf or subject to their own responsibility, but do so on behalf and subject to the responsibility of that board. Moreover, they do not bear the economic risk arising from their activities, in that they receive a fixed amount of compensation that does not depend on either their participation at meetings or their hours of actual work.

For this reason, their activities are not subject to VAT.

 

VAT/Transfer tax

The transfer tax due on the acquisition of jewelry is not contrary to the VAT Directive

Court of Justice of the European Union. Judgment of June 12, 2019

The Supreme Court requested a preliminary ruling by the CJEU as to whether a rule that requires a company to pay an indirect tax other than VAT (transfer tax) on the acquisition of movable property (gold, silver, jewelry) from individuals, even if those assets are intended for use in transactions subject to VAT within the company’s economic activities, is compatible with the VAT Directive and the principle of fiscal neutrality.

On the basis of its earlier decisions, the CJEU concluded that a tax like transfer tax is not precluded by the Directive and neither the Directive nor the principle of fiscal neutrality prevent the tax being charged in the case described by the Supreme Court.

 

Transfer and stamp tax

The withdrawal of tenants in common is subject to transfer tax if the tenancy in common continues

Supreme Court. Judgment of June 26, 2019

A couple and their two children purchased a property with a mortgage. Later the condominium was partially dissolved, and ownership of the whole building was transferred to the couple in exchange for (ii) taking on the whole debt in respect of the unpaid amount of the mortgage, and (iii) paying their children a cash sum equal to 50% of the building (less the amount of debt concerned) that was transferred to their parents.

Stamp tax was assessed on the partial liquidation of the condominium insofar as the transaction involved extinguishment of a tenancy in common on an indivisible asset. The tax authorities took the view, however, that transfer tax in respect of a transfer for consideration had fallen due because the condominium was not extinguished, but continued to exist with fewer tenants in common.

According to the court, this case did not involve (i) an instance of exercising a right to divide the jointly owned property, (ii) or an allocation to a tenant in common for the purpose of extinguishing a condominium. In short, because the tenancy in common was not extinguished (it continued to exist for two tenants in common), the transaction gave rise to an excess allocation subject to transfer tax as a transfer for consideration, not to stamp tax.

The judgment had a dissenting vote by three senior judges concluding that a transfer does not take place because the outgoing tenants in common only receive the value of their ideal share and, therefore, the cash payment they receive is not an excess allocation but instead the result of not dividing the jointly owned property, which does not alter the balance between the tenants in common.

 

Local taxes

A local tax cannot be charged on the inspection and monitoring of vacant dwellings performed by a local council

Supreme Court. Judgment of June 18, 2019

In a recent judgment, the Supreme Court confirmed that amendment of articles in the tax rules approved by Barcelona city council in relation to the tax on monitoring and inspection work on vacant dwellings in the city carried out by that local government was null and void.

The court affirmed that the government’s work on which the local tax was attempted to be charged does not fall within any of the services or activities taxable with a charge of this type.

 

Administrative procedure

Liability for taking part in the concealment of assets to prevent the payment of tax debts only exists where the unlawful acts took place after the debts arose

National Appellate Court. Judgments of March 22 and June 12, 2019

Article 42.2.a) of the General Taxation Law lays down joint and several liability for any individuals or legal entities causing or taking part in the concealment or transfer of assets and rights of the party with payment obligations to prevent action by the tax authorities.

The National Appellate Court held that an interpretation consistent with the letter and spirit of this law would be to conclude that a necessary requirement for implementation of the law is that the skirted tax debt must have already fallen due when the actions seeking liability took place.

The National Appellate Court took the view that only after the tax giving rise to the debt has fallen due may it be held that the person held liable knew of the existence of the debt and to avoid collection by the tax authorities, took part in the transactions to conceal assets.

 

Collection procedure

A judgment must have become final before the tax authorities’ right to collect a debt can recommence

Supreme Court. Judgment of July 2, 2019

An assessment was issued which, in addition to tax liability and late-payment interest, also contained the relevant penalty (at a time when penalties procedures did not yet have to be carried out separately). After confirmation of the assessment by the National Appellate Court, the taxpayer lodged a cassation appeal against only the portion relating to the penalty, which was upheld by the Supreme Court. In enforcement of the Supreme Court’s judgment, the tax authorities requested payment by the taxable person of the tax liability and the relevant late-payment interest and interest on stayed debt obligations (enforcement of the debt had been stayed by the court).

The taxpayer filed an appeal against the enforcement decision, pleading that the tax authorities’ right to collect had expired in relation to tax liability and interest, insofar as only the portion relating to the penalty had been challenged at the Supreme Court and more than four years had run since the National Appellate Court’s judgment.

The Supreme Court concluded that:

  1. In this case we are dealing with a single administrative measure that consists of two distinguishable parts: (i) tax liability and late-payment interest, and (ii) the penalty.
  2. The injunctive remedy to stay enforcement of the debt related to the whole debt, in other words, it applied to both the penalty and the tax liability and interest; and that injunctive remedy remained in force during the cassation appeal period.
  3. Therefore, while the appeal was being conducted, the tax authorities could not partially enforce the tax debt, even though only the penalty had been challenged in the appeal. There is no “partial finality” of judgments for these purposes that would enable a kind of “partial lifting” of injunctive remedies. As a matter of fact, the tax authorities cannot enforce a decision that has been stayed (i) until the court expressly orders the lifting of the injunctive remedy, or (ii) until a final judgment is rendered.

For those reasons, the Supreme Court confirmed that the enforcement decision by the authorities was correct.

 

Collection procedure

Applications for a stay and deferred payment of tax debts are compatible

Supreme Court. Judgment of June 12, 2019

A supreme court judgment has set aside article 46.8 of the General Collection Regulations, which laid down that when an application is made for deferred or split payment of a debt together with a stay of the same debt (even if one petition was made on a secondary basis to the other), the application for deferred or split payment had to be set aside.

The court explained as a ground for setting aside the application that:

  1. Article 65 of the Generation Taxation Law (LGT) defines deferred and split payment of tax debts and gives authority to the regulations to determine the terms and conditions for obtaining the right to deferred payment, but not to define non-acceptance of deferred payment. Article 65 of the LGT sets out a finite list of tax debts for which deferred or split payment is not allowed, and the debts on which a stay was requested are not among them.
  2. Therefore, it must be concluded that what article 46.8 of the General Collection Regulations does is create a condition for non-acceptance that is not provided for in the LGT, which entails that the regulations have overstepped the bounds of their rulemaking authority.

What we have here, in short, are two legally recognized rights for the taxpayer (to apply for deferred or split payment of a debt and a stay of its enforcement) which are compatible and relate to different purposes, and therefore cannot be restricted by the regulations.