Conflicts in the application of tax regulations:

Tax efficiency and abuse of law in the deductibility of VAT payments.  

The taxpayers, in the exercise of their tax contribution in the de facto case, must apply the tax rules to specify their fiscal impact; However, the taxpayer can try to find the more favorable alternative for greater tax efficiency Within reason, there may be mechanisms that are too laborious or artificial that lead to a conflict in the application of the tax law.  

The General Tax Law (LGT) Articles 15 and 16 regulate simulation and conflict in the application of tax regulations, respectively. These measures come to alleviate and put limits on the taxpayer's practice in the exercise of the application of the regulations, so the Tax agency could regularize the de facto situations if it is proven that there is an abuse of law.  

 Thus, and focusing on article 15 LGT regarding the conflict in the application of the tax norm, we can take into account that the same They can be given by different situations: irregular interpretation of the Law, tax structures with laborious planning, discrepancies in tax returns, changes in legislation, tax benefits or exemptions, etc.  

Needless to say, conflicts in the application of tax regulations They were not sanctionable until the reform of the General Tax Law in 2015. Since then and for them to be punishable, an administrative criterion must have been established that has been made public and there must be substantial equality of facts between both situations. We will find this advertising through the reports issued by the Advisory Commission on Conflict in the Application of the Standard.  

From a practical point of view and in accordance with the latest report issued by the Commission In July 2023, we can analyze a given situation in the artificial application of a company for the deductibility of input VAT in which there is a violation of article 15 LGT: 

• SM y ML, SL buys and acquires two homes worth 2 million euros + VAT and renovates them for a high value, deducting the VAT payments incurred for this renovation.  
• The company is controlled by FFTT parent.  

• The destination of the homes is rental to FFTT son (activity and exempt from VAT).  

Up to this point, we can note that the rental of housing to an individual (FFTT son) is an activity subject to and exempt from VAT, so SM and ML, SL could not deduct the input VAT. So how do they do it?  

In order to be able to deduct the VAT payments for the purchase and the renovation and to be able to request a refund, they rent the homes to another company, FFTT, SA. In this case, when carrying out a leasing activity to another company, the activity is subject to and not exempt from VAT, so VAT will accrue on the rental and SM and ML, SL will be able to deduct the input VAT payments.   

FFTT, SA transfers the uses of the homes to FFTT Jr., who is also the administrator of the company. FFTT, SA will not be able to deduct the VAT contributions paid by SM and ML, SL.  

In this case, we can see how there is a somewhat laborious and artificial corporate structure, which goes beyond reason and in order to obtain a tax advantage in the deductibility of VAT payments and in requesting their refund. There is a laborious game to obtain input VAT, when the only purpose is for the owner's son to live in the homes.   

Based on this, the Tax Agency, and as stated in the report itself, to be able to declare the conflict in the application of the standard and apply the corresponding sanctions, it is necessary that:  

1. The operations, considered as a whole, be artificial, that is, they fall outside the normal flow of legal business that is usually carried out or are too laborious without a clear purpose.  

2. No relevant legal or economic effects arise from them other than the tax savings derived from the operations carried out. 

In conclusion, and in light of the above, caution must be taken in the application of the tax law to understand where the limit would be between tax efficiency and abuse of law, since the taxpayer can look for favorable alternatives to his contribution without having to to pay taxes as much as possible (always within reason), but without them being a clear ruse to achieve tax savings that would not come from not carrying out the operations.   

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