Ruling num. 608/2021 dated 17 February 2021 from the Superior Court of Catalonia – Principles of "uniqueness" and "compartmentalisation" for Spanish tax purposes

The case at hand relates to a gift of shares in a non-listed Dutch company carried out in 2009 by a Spanish individual in favour of his grandchildren (all resident in Catalonia). The assets of the Dutch company were, for the most part, shares in a Spanish listed company.

In his Personal Income Tax ("PIT") return, the transferor valued the shares in the non-listed Dutch company by reference to one of the method prescribed by the Spanish PIT act (capitalisation at 20% of the average profits derived by the company in years 2006, 2007 and 2008).

The transferor's personal income tax return was subject to audit by the Spanish Central Tax Authorities and the gift was reviewed during such audit proceedings. Spanish Tax Authorities accepted the value recorded by the transferor in his return, for the purposes of calculating the capital gain resulting from the gift.

This same gift was again subject to audit, this time for the purposes of Spanish Inheritance and Gift Tax ("IGT") liability of the recipients. These audit proceedings were carried out by Regional Tax Authorities ("RTA"), who commissioned an expert valuation report in accordance with the provisions of the Spanish General Tax Act (Ley 58/2003, de 17 de diciembre, General Tributaria). This report determined that the shares in the non-listed Dutch company should be valued by reference to the average stock market value of the underlying Spanish shares on the day of the gift. The resulting value was four times that which the recipients had recorded in their IGT returns and, therefore, the RTA issued the corresponding tax assessments.

The recipients, in their pleadings before the Superior Court of Catalonia, maintained that the assessments from the RTA contravened both the Administration's own acts and the principle of "uniqueness" (under which, the value of a specific item assessed for the purposes of a particular tax, for instance PIT, should automatically determine the value of this same item for the purposes of another tax, such as IGT). Moreover, the plaintiffs also considered that the RTA had acted contrary to the principles of equal treatment, non-discrimination, legal certainty and legitimate expectations, in light of the unquestionable link between PIT and IGT:

1. In the case of transfers for no consideration, both IGT and PIT rules refer to the "real value" of the particular asset. This reference to identical concepts should mean that different valuations would not be justified and that, therefore, the value for IGT and PIT purposes cannot be different; and
2. The Central Tax Authorities had already reviewed the valuation, and their conclusion should be binding for all purposes on other tax authorities (the RTA), by virtue of the Administration's own acts and the principle of "uniqueness".

In this context, it is worth mentioning that the Spanish IGT Act (Ley 29/1987, de 18 de diciembre, del Impuesto sobre Sucesiones y Donaciones) provides that the taxable base, in the case of gifts and others transfers for no consideration inter vivos, will be the net value of the corresponding assets and rights and that such net value should be understood as the "real value" of such assets and rights from which the corresponding charges or debts will have been deducted.

As for the Spanish PIT Act, it establishes that, when an acquisition or a transfer has been carried out for no consideration, the real value of the corresponding assets will be determined in accordance with IGT rules. There is, therefore, a direct reference In PIT provisions to IGT valuation rules.

Both the RTA and the Spanish Central Administrative Tribunal considered that the principle of "compartmentalisation" should prevail, as opposed to the principle of "uniqueness", thereby arguing that the value assessed for PIT purposes would not be applicable for IGT purposes.

In this context and in accordance with the case-law of Spanish Supreme Court (ruling from December 9 2013 – ref. 5712/2011), neither the principle of "uniqueness", nor that of "compartmentalisation" should rigidly prevail over the other. Both principles should coexist and their applicability should be determined in each case by reference to the valuation concepts and methods defined in the rules pertaining to the corresponding tax.

In the present case, the Superior Court of Catalonia considered that the RTA could not contravene the Administration's "own acts" and the principle of uniqueness should prevail, given that the Central Tax Authorities had accepted for PIT purposes the value declared by the transferor. Therefore, Central Tax Authorities had assessed the "real value" of the shares in the non-listed Dutch company and this real value should also be taken into account for determining the taxable base for Spanish IGT purposes. In the context of the IGT audit, the RTA should have accepted the value determined for PIT purposes.