The Spanish Constitutional Court has declared that the regulation of instalment payments on account of corporate income tax is unconstitutional

In December 2018, the Spanish National Appellate Court (Audiencia Nacional) requested a ruling on the constitutionality of the Royal Decree-Law 2/2016. The Court took the view that such Act contravened legal limits imposed on Royal Decrees, as specific legislative measures, and also infringed well-established Spanish constitutional principles.

Measures approved by the Royal Decree

The Decree added a supplementary provision to the Spanish Corporate Income Tax Act (Law 27/2014), allowing for the introduction of two significant measures in the context of instalment payments on account of such tax:

• "Large companies" were again subject to a minimum instalment payment on the basis of their accounting profits; and
• The tax rate applicable to instalment payments, calculated according to a specific method, was increased (from 17% to 24%, for taxpayer subject to the general 25% rate).

Grounds of the dispute

The National Appellate Court requested from the Spanish Constitutional Court a ruling on the constitutionality of the above measures on the grounds that:

• Such measures were adopted in a Royal Decree and, as such, infringed the constitutional limits imposed on such Royal Decrees. In accordance with the Spanish Constitution, Royal Decrees may not legislate on issues which may affect certain constitutional rights and duties, such as the duty to cooperate in sustaining public expenditure.
• Such measures could be deemed to be in breach of the constitutional principle of economic capacity, whereby the fiscal burden imposed on a taxpayer must be adjusted in accordance with such capacity. In this context, the financial effort required from a taxpayer for the instalments payments does not disappear when the tax liability is adjusted in the final corporate income tax return.

Ruling from the Constitutional Court

The Spanish Constitutional Court has ruled that the Royal Decree-Law 2/2016 is indeed unconstitutional, siding with the Appellate Court. However, the ruling relates only to the first ground: the infringement on the constitutional limits within which a Royal Decree-Law may be used. The Constitutional Court reiterates that such a decree may not affect the rights, duties and freedoms contained in Title I of the Spanish Constitution, including the duty "to contribute to sustain public expenditure".

The Constitutional Court does not rule on the possible infringements of the constitutional principle of economic capacity, thereby limiting considerably the practical effects of its ruling.

Effects of the ruling

As mentioned, the Royal Decree has been voided only on "procedural" grounds: the legislative procedure for the approval of the measures was deemed inadequate. However, the Royal Decree-Law 2/2016 was only in force until July 2018, when the Spanish Budget law was enacted (Law 6/2018, dated July 3). The Budget Law replicated the provisions on instalment payments previously contained in Royal Decree 2/2016.

Therefore, taxpayers may only file claims in relation to instalment payments made between October 2016 y July 2018. Given that, in most cases, possible excess payments may have been corrected in the year-end tax return, it would seem that claims may only relate to late payment interest. The election of the appropriate procedure will be important, as claims should be weighed against potential extensions to the statute of limitations (the possibility to initiate general proceedings to claim damages from the State, instead of specific tax-related refund procedures should be explored).

Final comments

It is worth mentioning, as a final comment, that the National Apellate Court also considered (albeit obiter dicta) the potential unconstitutionality of the measures enacted in Royal Decree-Law 3/2016, on the same grounds as noted above in relation to Royal Decree-Law 2/2016. Royal Decree-Law 3/2016 contained controversial measures, such as:

• The limitation to carry-forward loss offset.
• The limitation to the application of certain tax credits.
• The impossibility to deduct losses deriving from the transfer of permanent establishments or of certain holdings (generally eligible for the Spanish participation exemption).
• The compulsory add-back of deductible portfolio depreciations.

It will be important to follow on the possibility to challenge these measures.