SPAIN: An Introduction to Tax
The Importance of Spanish Courts in the Tax System
Tax law is a legal discipline of extraordinary complexity, in which a simple reading of the approved regulations (which are numerous) is usually not sufficient to provide a clear answer as to the tax implications of a given transaction or economic reality.
Various factors contribute to this level of complexity, such as the presence of undefined legal concepts in the drafting of tax regulations, the high number of case studies in economic activity, which prevents statutory law from offering an ad hoc solution for each case, and the emergence, as a result of social, technological and economic advances, of new legal realities which are not covered or provided for in regulations, and which can sometimes become obsolete.
As such, tax-related disputes are frequent and it is often necessary to have recourse to the courts to settle disputes between taxpayers and the Administration, with the judicial bodies playing a major role in the interpretation of the tax system.
To this end, the role of the Supreme Court is significant in Spain, not only because it is the body at the top of the hierarchy of our judicial system, but also because of the interpretative work entrusted to it as a result of the reform of the cassation appeal system introduced by Organic Law 7/2015, which set out that, for an appeal in cassation to be admissible, there must be an objective interest in the creation of case law. The purpose is clear: to provide a solution to general problems, with the aim of providing legal certainty in the application of tax regulations.
As a result, and although the Supreme Court will of course resolve the specific cases that are brought before it, it is a fact that only questions whose interpretation by the Supreme Court will be of general interest to the Spanish tax system will be admitted.
More than seven years after the entry into force of this new appeal system, it can be stated without a doubt that the impact it has had on the interpretation and application of tax law has been enormous.
This is due not only to the large number of judgments handed down in this period of time (as the Section of the Supreme Court that deals with tax-related lawsuits is the one that has handed down the most judgments of all those that make up the Administrative Litigation Chamber), but above all due to the courage and dedication with which the judges of the Supreme Court have faced the task.
In fact, over the past few years we have seen judgments handed down that have resolved longstanding disputes, such as the VAT treatment of the contracting of financial derivatives and the transfer of shares in subsidiaries; that have resolved discrimination, such as that suffered by non-EU investment funds in the taxation of non-residents; or that have affected citizens as a whole, such as the classification of maternity and paternity benefits as exempt income.
But perhaps the most remarkable aspect is that the Supreme Court has not relied solely on the literal wording and purpose of the rules in order to interpret them, but has not hesitated to refer frequently to the general principles of law, such as the principle of good administration or legitimate expectations (embodied in the doctrine of “actos propios”), in order to correct situations of abuse which, although apparently protected by the literal wording of the rules, could be contrary to these general principles.
The Supreme Court is therefore playing a key role in determining how current tax regulations should be interpreted. At the same time, the Constitutional Court is also an essential part of the evolution of the tax system. In particular, in recent years it has clearly established the limits of the legislator’s ability to enact new regulations and has not hesitated to correct procedural excesses that have led to the unconstitutionality of measures with a high revenue impact.
In this regard, the recent ruling of the Constitutional Court declaring the unconstitutionality of three measures adopted in relation to Corporate Income Tax through Royal Decree-Law 3/2016 is noteworthy, as they were approved through a regulatory vehicle that is prohibited from adopting measures of this scope.
A Royal Decree-Law is a regulation with legal rank that is approved by the government, but only in situations of urgent and extraordinary necessity, insofar as it is an anomaly in the system of separation of powers established in the Spanish Constitution, since it authorises the executive to exercise the legislative function that normally belongs to the legislative power, ie, the Cortes Generales.
For this reason, the use of the Royal Decree-Laws is not only limited to these situations of extraordinary and urgent necessity, but their use is also prohibited for certain matters. Thus, in the field of taxation, the Royal Decree-Law is not admissible when it affects the duty to contribute to the support of public expenditure, as set forth in Article 31.1 of the Constitution.
Notwithstanding the above, it has not been uncommon over the past ten years for the Royal Decree-Law to be used to approve far-reaching tax measures. In the case of the aforementioned ruling, the measures included a limitation on the offsetting of negative tax bases and the application of deductions for international double taxation, as well as the obligation to reverse portfolio impairments, which had an impact on tax collection of over EUR4 billion per year.
In this regard, the Constitutional Court has been clear in declaring that the approval of this type of measure through a Royal Decree-Law is not permitted by the Spanish Constitution, as it had a notable impact on two structural elements (tax base and tax quota) of a fundamental part of the tax system, such as Corporate Income Tax, thereby affecting the essence of the duty of those liable for this tax to contribute. And this is not an isolated decision, as in 2020 the Constitutional Court already applied the same doctrine to annul the amendments made to tax instalment payments through another Royal Decree-Law (Royal Decree-Law 2/2016, contemporaneous with the recently annulled Royal Decree-Law).
The Constitutional Court’s ruling has led to the measures being declared unconstitutional, which will result not only in the repayment of amounts paid in excess over previous years to those taxpayers who appealed before the ruling, but also in the loss of the revenue expected to be generated by these measures in subsequent years. This is not a trivial matter, bearing in mind that the practice of approving tax measures via Royal Decree-Law continues, so it is likely that new rulings applying the same doctrine will be issued in the coming years.