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The reversal of the impairment of investments: An analysis of constitutional doubts

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Analysis of the Royal Decree-Law 3/2016 that introduced important reforms to corporations tax

Royal Decree-Law 3/2016 introduced important reforms to corporations tax in an attempt to “broaden its base” or, put more simply, to increase the revenue raised by the tax, given the poor state of government coffers at the time. Among other measures, that need to raise revenue resulted in the new regulation of the reversal of the impairment of investments.

As a rule, impairments of portfolio investments that were deductible prior to 1 January 2013 must be included in the taxable base for the period in which the value of equity in the subsidiary at the end of the year is higher than at the start of the year; in other words, impairments must be reversed as the value of investment in equity recovers. Our problem is with the “objective and mandatory” reversal even if there is no increase in the value of the equity of the subsidiary, i.e. the value of equity remains the same or even falls, since the regulation requires that impairments be reversed in equal parts in the corresponding tax base for each of the first five tax periods from 1 January 2016 onwards.

For example: In 2011 and 2012, Entity “A” impaired 100% of the value of its shareholding in Entity “B”, a developer, since the losses recorded by the latter in said tax periods had seen the net equity of Entity “B” fall into negative territory. In 2016, Entity “B” continued to record small losses; as a result, it does not make sense from an accounting perspective to reverse the impairment. In this case, the measure introduced by the Royal Decree-Law requires Entity “A” to incorporate 1/5 of the impairment recorded and deducted prior to 1 January 2013 into its taxable base.


The desired effect of the regulation

In our example, one can clearly see how the measure introduced has the desired effect of the regulation: to raise revenue. However, it has a devastating effect on the long-suffering taxpayer: non-existent profits are taxed, with the result that what was deductible prior to 2013 becomes taxable income in 2016 even if there is no recovery in the value of the investment, radically changing the rules of the game.

In view of this regulation, we can only hope that our courts will react and remind the legislature that the constitution sets out certain limitations that cannot be overcome: economic capacity, the non-retrospective nature of regulations that clash with the principle of legal security and the reservation of law that limits the use of the Royal Decree-Law.

Starting with economic capacity, Art. 31.1 of the Constitution sets out the obligation of all citizens to contribute to “the payment of public expenditure pursuant to their economic capacity”, a mandate that results not only in a positive obligation (to contribute) but also a correlative right: that “said solidarity contribution be configured in each case by the legislature according to said capacity” (JSC 182/1997 and 107/2015), with the result that the “tax paid cannot be made to depend on situations that do not reflect economic capacity” (JSC 194/2000; 193/2004).

In the example above, what expression of economic capacity is given when the subsidiary continues to record losses? Is there not taxation of non-existent profits? Secondly, in our opinion, the regulation is retrospective and clashes with the principle of legal security, since it turns what was classified as a deduction prior to 1 January 2013 into an expense, even if the requirements specified in the regulations governing said expenditure for its reversal are not met, with the result that what was deductible prior to 1 January 2013 are no longer deductible in 2016 and subsequent years, which may be contrary to the principle of legal security.

Article 86.1 of the Constitution

Finally, Article 86.1 of the Constitution states that the Decree-Law cannot affect “the rights, obligations and freedoms of citizens regulated in Title I”, which includes Article 31, which regulates the obligation to pay tax. This Royal Decree-Law affects a tax that is an essential element of our taxation system, has a very significant impact on the tax base and the measures introduced (which do not consist solely of the reversal of impairments of subsidiaries) potentially affect all persons liable for the tax. In addition, nor are the urgency and extraordinary need for the measure that would justify the use of the Royal Decree-Law clear.

In short, there can be no doubt that many taxpayers will request a correction of their tax returns for 2016 from the Spanish tax office, an issue that will have to be resolved by the Constitutional Court.


For further information, please contact:

Enrique Vázquez Alcover



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