- Summary
On 18 January 2024, the Spanish Constitutional Court (“CC”) issued its judgment 11/2024 and declared certain corporate income tax (“CIT”) restrictive measures introduced in 2016 to be unconstitutional and therefore void. These measures affected large companies and companies which in the past held shares in other companies and had declared impairment losses.
However, in line with previous decisions, the CC limited the effects of its judgment to only those cases where taxpayers had challenged the above CIT measures before date of publication of the CC’s judgment and their case was not final.
The CC’s decision highlights the importance of seeking expert tax advice in advance, as well as of having proper tax litigation strategies in place.
- Background
On 2 December 2016, the Spanish Cabinet issued Royal Decree-Law No. 3/2016 (“RDL 3/2016”), which was gazetted the following day.
RDL 3/2016 introduced several restrictive tax measures with the objective of increasing tax revenue and tackling a long-running budget deficit. The following CIT measures were implemented among other measures, with retroactive effect to tax periods starting on or from 1 January 2016:
- An increased limitation to the amount of tax losses that companies are entitled to offset. Generally, and subject to other temporary measures that applied only in 2016, companies were entitled to offset previous tax losses with up to 70% of the positive tax base of the year in which they wish to offset them, with a minimum offsetable floor of EUR 1 million. The 70% limit was lowered to 50% of the tax base for those companies with annual revenue between EUR 20 million and EUR 60 million, and to only 25% of the tax base for those companies with revenue exceeding EUR 60 million. Non-offset losses could be offset in subsequent years, subject to the above limitations.
- A new limit to the amount of tax credits for the avoidance of international double taxation that companies are entitled to claim. Under the new limit, applicable only to companies with annual revenue of EUR 20 million or more, the total tax credits to avoid international double taxation that could be claimed in any given year could not exceed 50% of the gross tax quota; that is, the quota before claiming any tax credits and deductions.
- A new obligation to reverse the impairment losses declared in respect of shares owned in other companies, if and to the extent that such losses had been tax deductible (i.e. those declared before 2013, given that since 2013 such losses are not tax deductible). The obligation was to reverse such impairment losses solely from a tax perspective (i.e. to pay tax on the same), starting in 2016 and within the next 5 years, at an annual rate of one fifth each year, even if the underlying shares did not recover their value.
The first two measures targeted large and relatively large companies, whereas the third measure affected any company which owned shares in another company and where the parent company had declared an impairment tax loss in respect of the value in the participated entity.
A large Spanish company did not agree with the use of a Decree-Law instead of an ordinary law to introduce the above restrictive tax measures. Consequently, it challenged before the courts the Ministerial Order approving the CIT return form for the year 2016, which had included the new boxes reflecting the restrictive measures implemented by RDL 3/2016.
The competent court doubted about the constitutionality of RDL 3/2016 and raised a constitutionality query to the CC.
- The Constitutional Court’s decision
On 18 January 2024, the CC deliberated and examined the constitutionality of RDL 3/2016.
In particular, and considering the question raised by the referring court, the CC’s analysis was limited to whether RDL 3/2016 breached the substantive limit that Article 86.1 of the Constitution imposes on the Government when issuing Decree-Laws, in connection with the duty to contribute to the sustainment of the State’s public expenses regulated in Article 31.1 of the Constitution.
Article 86.1 of the Constitution provides as follows:
“1. In case of extraordinary and urgent need, the Government may issue provisional legislative measures that shall take the form of Decree-Laws and that shall not affect the organisation of the State’s basic institutions, the rights, duties and freedoms of citizens regulated in Title I, the Autonomous Communities’ regime or the general electoral law.”
Article 31.1 of the Constitution – which is included in its Title I – provides as follows:
- Everyone shall contribute to the sustainment of public expenses in accordance with their economic capacity through a fair tax system inspired by the principles of equality and progressivity that, in no event, may have a confiscatory reach.”
The CC, in its judgment, concluded that RDL 3/2016 affected the duty to contribute to the sustainment of the State’s public expenses, a result which is prohibited under Article 86.1 of the Constitution, on the basis that:
- The CIT is a basic pillar of direct taxation in Spain;
- The CIT aspects which were modified by RDL 3/2016 are the taxable base and the tax quota, which are structural components of the CIT; and
- RDL 3/2016 had a significant impact in terms of raising CIT revenue.
Accordingly, the CC declared the CIT measures introduced by RDL 3/2016 to be unconstitutional, therefore void and with no effect.
However, the CC limited the effects of its own decision, in line with its judgment no. 182/2021 regarding the IIVTNU (also known as “municipality capital gain tax”). The CC’s argued that preserving legal certainty compelled it to impose such limitation. In particular, the CC ruled that the effects of its unconstitutionality declaration should not extend to the following situations:
- To tax obligations in respect of which a final judgment with the force of res judicata or a final administrative decision had been rendered before the CC’s decision date; and
- To tax assessments that had not been challenged, and to self-assessments/returns in respect of which no rectification had been sought, in both cases before the CC’s decision date.
One of the judges at the CC casted a partially dissenting opinion. He agreed with the CC’s substantive position and with the limitation of effects in those tax situations mentioned in the first bullet point above. However, the dissenting judge considered that the CC should have justified why it chose to limit the effects of those tax situations mentioned in the second bullet point above.
- Our comments
We agree with the substantive findings of the CC. The Government once again misused a Decree-Law to regulate tax matters which should be governed by an ordinary law issued by the Parliament. The CC’s decision adds another score to the list of unfavourable decisions received by the Government due to using Decree-Laws on tax matters, such as in the CC’s judgments 73/2017 and 78/2020.
However, the CC’s decision to limit its own effects is more questionable. In particular, the decision to limit its effects in the case of tax assessments or self-assessments which are still within the 4-year statute of limitation but where the taxpayer did not challenge them or seek a rectification of its own tax return. The CC sends a clear message to taxpayers, in the same way as it did in its judgment no. 182/2021: if there are doubts about the constitutionality of a certain legal provision which affects a tax obligation, the taxpayer is under a quasi-obligation to challenge it before the tax authorities, and ultimately before the tax committees and courts. If the taxpayer does not object in advance, it would not benefit from the CC’s unconstitutionality decision.
An undesired but likely consequence of the CC’s decision is that taxpayers now have an incentive to litigate pre-emptively, otherwise they may end up forgoing their rights. It is difficult to see how this will contribute to reducing the already high backlog of the tax authorities, tax committees and courts.
Lastly, a tip from a practical perspective – taxpayers should be cautious not to challenge their own tax returns too soon. In this case, the CC’s decision comes more than 7 years after the unconstitutional measures (RDL 3/2016) were published. In some cases, a tax dispute could have completed all judicial stages and thus become final. Therefore, the key is to keep the tax disputes alive, until such time when the CC or any other final body issues its decision. This requires expert counsel from tax litigation lawyers, who are well versed about tax litigation procedures and strategies, and who are up to date with the ongoing challenges to the tax laws that are brought before higher judicial instances (the Supreme Court, the CC, the European Court of Justice, etc.).
In summary, the CC’s decision highlights the importance of seeking expert tax advice in advance and having adequate tax litigation strategies in place.
- How we can help
Our Spanish tax team is expert on corporate income tax and tax litigation matters. They regularly advise clients and represent them in tax disputes before the tax authorities, the tax committees and courts. Do not hesitate to contact us if you require any assistance.