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In 2014, the Court of Justice of the European Union (“CJEU”) issued an important ruling regarding corporate tax consolidation (joined cases C-39/13, C-40/13 y C-41/13). In it, the European high court further explored key aspects of its previous decision on the Papillon case (C-418/07), concluding that any rules preventing the tax consolidation of sister companies the common parent company of which has its seat in that Member State are contrary to the principle of freedom of establishment.
Although the CJEU was judging a case under Dutch law, the ruling was highly relevant from a Spanish legal perspective, as the Act Consolidating the Company Tax Act (“TRLIS”) in force at the time forbade horizontal groups from applying the tax consolidation regime (namely, groups whose Spanish companies were controlled directly or indirectly by a company resident outside Spain).
Due to the situation of uncertainty, the Spanish lawmakers were slow to react and only looked to the future. Thus, the new Spanish Corporate Income Tax Act that came into force in 2015 redefined the tax consolidation perimeter, enabling these structures to apply the special regime. However, the solution circumvented legal situations arising before 2015 (outside the temporary scope of the Corporate Income Tax Act).
So what should be done with regard to years before 2015? It is clear that Spanish law does not make it easy for taxpayers when it comes to defending and guarding their interests in this scenario. The administrative procedure is burdensome and, in practice, forces taxpayers to overcome no end of hurdles (especially if they are seeking acknowledgment of state liability from the state or public administration). Therefore, it is to be welcomed that every so often the economic and administrative tribunals shed light on how to get around them—specifically, the Central Economic and Administrative Tribunal (“TEAC”) in its resolution of March 8, 2018.
In this resolution, the TEAC analyzes a scenario involving three companies that are tax resident in Spain and directly owned by a company that is tax resident in the Netherlands. The Spanish companies had paid taxes from financial years 2011 to 2014, under the individual corporate income tax system. They later requested the rectification of their corporate income tax self-assessments and acknowledgment of their right to be taxed under the tax consolidation regime in those years, based on the CJEU’s ruling. In the face of the tax authorities’ refusal, the Spanish companies filed an economic-administrative appeal with the TEAC, which has finally upheld the taxpayers’ claim.
The TEAC based its decision on the predominance of EU law over Spanish national law, drawing attention to the fact that the CJEU ruling has ex tunc effects and extending its scope to years that were not statute-barred and in which the former TRLIS was still applicable until 2014. Thus, it acknowledges the right of companies belonging to a horizontal group to apply the tax consolidation regime in those years, even though TRLIS did not envisage this possibility and no agreements were enforced at the time regarding the special regime option.
In practice, the TEAC resolution is particularly important for horizontal groups in which one of the sister companies has accumulated tax loss carryforwards in years that were not statute-barred under the former TRLIS.
In this scenario, acknowledging the right to be taxed under the tax consolidation regime for years before 2015 means that individual tax losses will be considered to have been incurred during tax consolidation. This could facilitate a carryforward, both in the years they were incurred (if the sister companies incurred enough taxable profits in those years) and in subsequent years with regard to the group’s tax loss carryforward, as that carryforward would only be subject to the generally applicable limits affecting the group’s taxable profits (i.e., without the taxable profits of the company incurring the tax loss affecting the limit of the carryforward, which occurs the case of tax credits arising in years before the consolidation).
Therefore, when it comes to taxpayers that belong to a horizontal group, the TEAC resolution makes it advisable to review corporate income tax self-assessments corresponding to non-statute-barred years in which the TRLIS was in force (for taxpayers whose tax year coincides with calendar year, this would affect 2013 and 2014) to ascertain whether extending the special tax consolidation regime to those years will allow them to benefit from the tax credit accrued in those years.
Author: Javier Calle
This post is also available in: Español