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Direct taxation: Commission requests Spain to amend laws incompatible with the EC Treaty
The European Commission has sent Spain a formal request to amend its discriminatory legislation concerning the taxation of non-residents’ employment-related income and concerning capital gains realised by non-residents on the sale of Spanish immovable property. In addition, the Commission has decided to send a formal request to Spain to amend its rules concerning taxes on the raising of capital which the Commission believes are not in line with the Directive concerning indirect taxes on the raising of capital (69/335/EEC). The European Commission has also sent Spain a formal request to amend its legislation concerning the tax deductibility of costs for research, development and technological innovation. These requests are in the form of reasoned opinions, the second stage of the infringement procedure under Article 226 of the Treaty. If Spain does not amend its laws within two months, the Commission may refer the cases to the Court of Justice.

Employment income and capital gains of non-residents

Spanish tax legislation subjects resident individuals to progressive taxation on their employment-related income while generally applying a tax rate of 25% to the Spanish income from employment of non-resident individuals (with exceptions for pensions and for income of non-resident short term employees). As a result, non-residents are subject to a higher tax burden than resident individuals, because the latter are subject to progressive rates of taxation from 15% up to 45%. The difference in treatment is most significant in the case of taxpayers receiving a comparatively low income, such as trainees.

In relation to capital gains, non-resident individuals are taxed at a flat rate of 35% on gains from the sale of immoveable property. Residents, on the other hand, are subject to the above progressive rates of taxation when the fixed assets remain within the possession of the taxpayer for less than one year, and to a rate of 15% when the assets are realised after one year of possession. Thus, non-resident individuals are always subject to a higher tax burden if they sell their property after one year of possession, and are so in most cases if the property is sold within the year after acquisition.

The Commission considers that the difference in the tax treatment of the two categories of taxpayers, in so far as it results in a higher tax burden on non-resident individuals in situations objectively similar to those of residents, constitutes indirect discrimination on the grounds of nationality prohibited by the Treaty. The higher tax burden on non-residents may dissuade individuals from taking up employment or buying immovable property in Spain while remaining resident for tax purposes in another Member State. It also makes it less attractive for Spanish employers to recruit labour from other Member States rather than locally.

Taxes on the raising of capital

Directive 69/335/EEC gives Member States the right, but not the obligation, to impose capital duty on a company that is formed within that Member State at a maximum rate of 1%. But this Directive does not give Member States the option to treat identical transactions differently.

Under Spanish rules, companies that transfer their registered office or their effective centre of management from another Member State to Spain are subject to capital duty if this transfer has not been subject to capital duty in the other EU Member State (which has an option under the Directive not to apply a capital duty). The Commission considers that these rules are not in line with the Directive because under the Directive only the Member State where the company is formed has the right to apply capital duty.

Spain also taxes Spanish branches and permanent establishments of companies of other EU Member States which do not levy capital duty. Under the Directive only the Member State in whose territory the effective centre of management of the company is located has the right to levy capital duty.

Furthermore, Spain only exempts certain reorganisation transactions whereas under the Directive all transactions must be treated equally.

Finally, Spain exempts the exchange of shares where a company receives at least 75% of the issued share capital of another company. However, if that company subsequently acquires further shares, this transaction is subject to capital duty. The Commission considers that Spain must also exempt the further exchange of shares.

Tax deductibility of costs for research, development and technological innovation

Spanish tax legislation provides that costs for research, development and technological innovation are fully deductible as professional expenses if these activities are carried out in Spain. However, if these activities are carried out abroad, they are only tax deductible if the main research, development and technological innovation activity takes place in Spain. In any event, the activities abroad are only deductible up to 25% of the expenditure.

Moreover, where a company sub-contracts research, development and technological innovation to universities and public research bodies recognised by Spanish law it benefits from a higher tax deduction than in the case of research subcontracted to foreign universities and public research bodies.

The limitation of deductibility of these costs incurred abroad as well the preferential treatment of activities sub-contracted to national institutions constitute obstacles to the freedom of establishment and the free provision of services (Articles 43 and 49 of the EC Treaty), as they can discourage companies from undertaking research, development and technological innovation in other EU Member States and EEA countries. The same line of reasoning can already be found in the recent judgment of the European Court of Justice in the case C-39/04 (Laboratoires Fournier) where the Court held that Article 49 of the EC Treaty (on the freedom to provide services) precludes legislation of a Member State which restricts the benefit of a research tax credit to research carried out in that Member State.

Capital duty: Commission decides to refer Spain to the Court of Justice for infringements of the Capital Duty Directive
The European Commission has decided to refer Spain to the Court of Justice for a number of infringements to the Capital Duty Directive. Spain has not changed its legislation despite a formal request by the Commission dated 13 July 2005 (IP/05/933).

“The Capital Duty Directive provides rules to make it easier to reorganise companies and to transfer their seat: these rules must be respected in order to facilitate the development of our EU companies” said László Kovács, the European Commissioner for Taxation and Customs Union.

The Capital Duty Directive (69/335/EEC) gives Member States the right, but not the obligation, to impose capital duty at a maximum rate of 1% on the creation of a company in that Member State. According to the Commission, some aspects of the Spanish legislation are not in line with this Directive.

•Given that the Directive allows only the Member State where the company is created to levy capital duty, the Commission considers that Spain infringes the Directive when levying capital duty
•On the transfer of the registered office or the effective centre of management of a company from another Member State to Spain, if the creation of the relevant company had not been subject to capital duty in the other Member State (which under the Directive has an option not to apply a capital duty).
•On capital used for trading operations carried by Spanish branches and permanent establishments of companies created in other Member States which do not levy capital duty.
•Spain solely exempts certain reorganisation transactions whereas the Directive does not give Member States the option to treat identical transactions differently.
•Finally, Spain exempts the exchange of shares where a company receives at least 75% of the issued share capital of another company. However, if that company subsequently acquires further shares, this transaction is subject to capital duty. The Commission considers that under the Directive Spain must also exempt the further exchange of shares.

Capital duty: Commission closes infringement proceeding against Spain
The European Commission has closed the case against Spain over its legislation on Registration fees for the registration of capital increase to the Commercial Register. It considers that the arguments provided by the Spanish authorities show that the registration fees do not amount to a tax. Therefore, the European Commission has closed the case against Spain over its tax rules concerning indirect taxes on the raising of capital (69/335/EEC).
Under Spanish legislation companies have to pay to the Registradores the registration fees for the registration of capital increase in the Commercial Register.

In July 2006, the European Commission had sent a Reasoned Opinion to Spain based on its assessment that these fees were to be considered (at least partially) as taxes not compatible with the Capital Duty Directive (IP/06/962). Following the subsequent explanation by Spain that registration fees are not transferred, not even part of them, to the State or other Regional or Local entity, the Commission has now closed the case, as there is no infringement.

The ECJ had ruled in a similar issue (C-165/03) that the relevant criterion for the categorisation of fees as taxes for the purposes of Directive 69/335 is the transfer to a public budget.

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