Spain: Spanish Constitutional Court reviews minimum corporate income tax prepayments

Published in a special issue of the official State Gazette on September 30 2016, Royal Decree-Law 2/2016 introduced a number of tax measures seeking to reduce the budget deficit. The introduction of a minimum prepayment for large entities was by far the most prominent of these measures.

Since the decree-law came into force, qualifying companies have been required to make prepayments equal to 23% of the income reported on their income statements for the first three, nine or 11 months of the calendar year.

The calculation method for the minimum prepayment contravenes the adjustments allowed in the Corporate Income Tax Law (IS) in determining the corporate income tax (CIT). As such, they are forced to keep exempt income in that figure and exclude any other tax adjustments, in addition to not being able to offset any net operating loss carried forward.

In practice, almost every qualifying company has been required to make advance payments higher than the amounts determined on their final self-assessment returns since the decree-law came into force. They have also been allowed to later obtain (generally in approximately 15 months) a refund of the amount paid in excess (although without receiving any financial compensation in return).

The justification for this measure was, according to the Spanish government, the need to "gather funds immediately in the public purse" to meet the public deficit reduction targets imposed on Spain by the European Commission (EC).

However, in a decision dated December 14 2018, the National Appellate Court (Judicial Review Chamber) requested a ruling on unconstitutionality by arguing the following:

1) It crossed forbidden limits for a Royal Decree-Law. Article 86.1 of the Spanish Constitution prohibits royal decree-laws from regulating matters affecting certain constitutionally-recognised rights, duties and freedoms, such as the duty to contribute to sustaining public expenditure under Article 31 of the Constitution.

The National Appellate Court considers that the minimum prepayment has crossed that limit because it alters, albeit provisionally, citizens' duties to contribute to sustaining public expenditure. This is because taxpayers have made a "fiscal effort" and have had to bear tax pressure higher than the final tax liability in the period between the prepayment and the assessment of the tax, and have therefore been contributing over all that time to sustaining public expenditure, which could have had:

Important repercussions on the company's financial position and on business activity which do not cease to exist just because a portion of what they paid is refunded to them without interest.

2) Breach of the principle of economic capacity.

The court also held that the minimum prepayment under Royal Decree-Law 2/2016 is completely detached from the final corporate income tax liability, which determines a breach of the principle of economic capacity (enshrined in Article 31.1 of the Spanish Constitution), in that prepayments are increased arbitrarily without having regard to actual economic capacity.

Due to the relevance of all these findings, the National Appellate Court also made a passing reference in that decision to Royal Decree-Law 3/2016 (published on December 2 2016, and introducing, among other measures, the reversal in parts of tax-deductible provisions/impairment losses, new limits on the offset of net operating loss carryforwards, and certain tax credits, together with a few restrictions on the ability to deduct losses generated on the transfer of shares).

It also affirmed that it amends essential elements of the tax and enters into forbidden terrain for that legislative instrument, which could be a sign that the decree may also breach Article 86.1 of the Spanish Constitution, at least.

Regardless of what the court's conclusion will be, there is a need for the highest interpreter of the Spanish Constitution to conduct a fresh review of the constitutional limits on the use of decree-laws in the field of tax.

Additionally, it appears advisable to examine the impact that the legislation approved through these instruments has been able to generate on corporate income taxpayers, so that the representatives of those companies will be able to consider the repercussions with their advisors in the event of a decision holding them unconstitutional.

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