Spain: Question of unconstitutionality against Royal Decree 3-2016

The Spanish National Court has raised a question of unconstitutionality before the Constitutional Court of Royal Decree 3/2016, dated 2 December 2016, on the grounds that (i) it is contrary to the Spanish Constitution as it violates the limits of the power to legislate by Royal Decree (Article 86.1 of the Spanish Constitution) and (ii) it violates the principle of economic capacity (article 31 of the Spanish Constitution).

The decision to be adopted by the Constitutional Court should be coherent with its recent judgment declaring Royal Decree 2/2016, which amended the Corporate Income Tax (CIT) advance payment regime established for large taxpayers, unconstitutional and, therefore, null and void, since:

• This Royal Decree introduced amendments to the CIT, which is one of the most relevant taxes in the Spanish tax system.
• The amendments affect key aspects of the tax, insofar as they correspond to a structural element of the CIT, such as the determination of the taxable base.

Background

The tax measures approved by Royal Decree 3/2016, were aimed at increasing the tax revenues and reducing public deficit. The main measures introduced were amendments to the CIT which had significant economic impact, especially on large taxpayers. Some of these main tax measures are summarized below.

1. Limits to carry forward tax losses

As a general rule, the offsetting of net operating losses (NOLs) is limited to 70% of the taxable base, with a minimum amount of EUR1 million. Effective as of fiscal years starting after January 1, 2016, the Royal Decree 3/2016 reduced the previous limit to 60% of the taxable base and, for large taxpayers with net revenues equal to or above EUR20 million in the previous 12 months, to:

• 50% of the taxable base, for entities with net revenues equal to or above EUR20 million and below EUR60 million.
• 25% of the taxable base, for entities with net revenues equal to or above EUR60 million.

The same limits were introduced for cooperatives with net revenues above EUR20 million in the previous 12 months.

2. Limits to domestic and international double taxation credit

Royal Decree 3/2016 established for large taxpayers, effective as of fiscal years starting after January 1, 2016, an aggregate  limit of 50% of the gross tax payable of the tax year for the use of domestic and international double taxation credits.

3. Reversal of impairment losses of subsidiaries deducted before 2013

Until 2013, impairment losses on subsidiaries were deductible for CIT purposes. The CIT Law was however amended to establish the obligation to reverse such losses when the subsidiary’s equity was increased or the subsidiary distributed dividends. Effective as of fiscal  years starting on January 1, 2016, Royal Decree 3/2016 established a minimum 20% (ie five years) reversal of the total amount deducted up to 2013.

4. Limits to the deductibility of losses on “qualified shares” transfers

Effective as of fiscal years starting after January 1, 2017, the Royal Decree 3/2016 declared  the losses on transfer of shares eligible for the participation exemption regime on dividends and capital gains set forth in article 21 CIT Law as non-deductible for Spanish CIT purposes.  

5. Limits to the deduction of losses on the transfer of permanent establishments

Effective as of fiscal years starting after January 1, 2017, the Royal Decree 3/2016 declared  the losses incurred abroad as a result of the transfer of a permanent establishment as non-deductible for Spanish CIT purposes.

Key takeaways

If the Constitutional Court declares the Royal Decree 3/2016 unconstitutional and, therefore, it is null and void, taxpayers affected by these amendments could request the refund of unduly paid taxes in non-statute barred years, plus delay interests.

However, if the tax year concerned is statue barred before Royal Decree 3/2016 is declared unconstitutional is most likely that it will not be possible to file a refund claim.

In this regard, please note that, as a general rule, tax year 2016 is about to be statute barred (taking into account the 78 days statute of limitations suspension due to the declaration of the State of Alarm) for entities with tax years ending 31 December. As a result, we recommend to review the implications of these measures and file a refund claim even though the Constitutional Court has not issued yet its resolution in order to avoid the tax years concerned to be statue barred.