1. Overview
On 18 January 2024, the Spanish Constitutional Court (“CC”) ruled that certain provisions of the corporate income tax (“CIT”) reforms introduced in 2016 were unconstitutional. However, the Court decided to limit the application of this ruling, specifying that it only applies to cases where taxpayers had contested these measures before the publication date of the ruling and their cases were not final.
The CC’s ruling serves as a reminder of the importance of obtaining expert tax advice early on and implementing effective strategies for tax litigation.
2. Background of the Case
On 2 December 2016, the Spanish Cabinet passed Royal Decree-Law No. 3/2016 (“RDL 3/2016”), which was published the following day. The decree introduced a set of restrictive tax measures aimed at boosting revenue and addressing a longstanding budget deficit. The measures, retroactive to tax periods beginning on or after 1 January 2016, included the following:
- Limitations on Tax Loss Offsets: Companies were allowed to offset prior tax losses against up to 70% of the current year’s taxable income, subject to other specific exceptions for 2016. For companies with annual revenues between EUR 20 million and EUR 60 million, the limit was reduced to 50%, and for those with revenues above EUR 60 million, the offset limit was set at 25%. Any unutilized losses could be carried forward and offset in future years, subject to these caps.
- Capping Tax Credits for International Double Taxation: For companies with revenues exceeding EUR 20 million, the total amount of tax credits that could be claimed in any given year to offset international double taxation was capped at 50% of the gross tax quota (before applying deductions or credits).
- Mandatory Reversal of Impairment Losses: Companies that had previously claimed tax deductions for impairment losses on shares held in other companies (dating back to losses declared before 2013) were required to reverse those losses for tax purposes. This reversal had to occur over five years, starting in 2016, even if the underlying asset had not regained its value.
The first two measures primarily targeted larger companies, while the third affected any company owning shares in another entity where impairment tax losses had been declared.
A prominent Spanish company contested the legality of the decree-law, arguing that it was improperly introduced via a Decree-Law rather than through regular parliamentary procedure. The case was subsequently referred to the CC for examination.
3. Constitutional Court’s Ruling
On 18 January 2024, the CC reviewed the constitutionality of RDL 3/2016. The Court focused on whether the measures violated Article 86.1 of the Spanish Constitution, which sets limits on the government’s ability to issue Decree-Laws. Specifically, it examined whether the measures affected the public’s duty to contribute to the State’s expenses, as stipulated in Article 31.1.
Article 86.1 of the Constitution allows the government to issue Decree-Laws only in cases of urgent necessity but prohibits them from affecting fundamental rights or constitutional norms. Article 31.1 requires that taxes be fair and non-confiscatory.
The Court concluded that the measures in RDL 3/2016 indeed violated these provisions. It determined that corporate income tax is a fundamental part of Spain’s tax system and that changes to the taxable base and tax quota (as implemented by the decree) amounted to structural alterations with significant fiscal implications. As a result, the CC declared these tax measures unconstitutional.
Despite this, the Court limited the effects of its ruling, following its earlier decision in Case No. 182/2021 related to municipal capital gains tax. The Court ruled that the effects of its decision would not extend to:
- Tax obligations that had already been settled with a final judgment or an unappealable administrative decision by the date of the CC’s ruling.
- Tax assessments that had not been contested, or self-assessments/returns that had not been corrected, before the ruling date.
One judge issued a partially dissenting opinion, agreeing with the overall substantive conclusion but questioning the justification for limiting the ruling’s effects in cases where taxpayers had not challenged their tax returns.
4. Analysis and Commentary
We agree with the CC’s substantive ruling, which highlights the misuse of Decree-Laws in the realm of tax legislation—a concern echoed in previous CC rulings such as those in 73/2017 and 78/2020.
However, the decision to restrict the ruling’s impact raises concerns. The Court’s limitation means taxpayers who did not challenge the unconstitutional measures in time could lose their right to benefit from the ruling. This sends a clear signal that taxpayers should challenge potentially unconstitutional provisions promptly. Failure to do so could forfeit their rights under future rulings.
This decision could also incentivize taxpayers to initiate legal challenges preemptively, potentially adding to the already overloaded tax authorities and courts, which may not be ideal from an administrative perspective.
Taxpayers should be cautious not to contest their tax returns prematurely. The CC’s ruling came over seven years after the contested measures were introduced. In some instances, tax disputes may have already been resolved, and challenging returns too early could inadvertently lead to complications. Staying vigilant and consulting experienced tax litigation lawyers is crucial for ensuring the best approach to such issues.
5. How We Can Assist You
Our Spanish tax team specializes in corporate income tax matters and tax litigation. We regularly assist clients in navigating tax disputes, providing strategic advice on tax issues, and representing clients before the tax authorities, courts, and other relevant bodies. If you need help with any aspect of tax litigation or have questions about the recent CC ruling, feel free to contact us for expert guidance.