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Light at the End of the Tunnel: Court Supports Reversal of Impairment Losses

21 Jun 2011

On 4 November 2010 the National Appellate Court analysed an issue that has traditionally been a bone of contention between the tax authorities and taxpayers: the reversal of impairment losses where the assets in question were acquired by a non-resident company. Taxand Spain examine the support shown by the court regarding the reversal of impairment lossesand why this means there's a light at the end of the tunnel for taxpayers.

In this case, a Spanish company had contributed its shares in an Argentine subsidiary in a Netherlands company in 1998. The Spanish company reported a tax-deductible loss on the contribution.

Later, at the end of 1998, the Argentine company's shares regained value and, as a result, the inspectors recognised a gain for the Spanish company.

The novel aspect of this judgment relates to Article 19.6 of the Corporate Income Tax Law, which requires that the reversal of impairment losses, in respect of assets that have been adjusted for impairment, to be recognised in the tax period in which the reversal took place, either at the entity that made the adjustment or at a related entity.

The same rule applies to losses resulting from the transfer of fixed assets that were reacquired within 6 months following their transfer date.

The court echoed the debate about whether the case in question would be subject to the first part of article 19.6 (applicable to the recovery of impairment losses) or to the second part (applicable to the recovery of transfer losses), to conclude that the second part would apply because there had been a transfer.

The main issue was addressed by the court, however, in its analysis of who should make the reversal. When it stated that it must be done by the company that owns the asset when it regains value, the Netherlands company that owned the shares then the standard rule does not apply where the acquirer is a nonresident company.

Taxand's Take

The National Appellate Court held that the regained value and, thus, revenue that belonged to the company that owned the shares at that time, should not be taxed according to tax treaty provisions.

Although this judgment may be appealed against before the Supreme Court, it is a first step in support of the interpretation being sustained up to now by taxpayers which, having made a transfer based on valid economic reasons, were being subjected to adjustments by the tax authorities. There's now a light at the end of the tunnel for taxpayers.

However, we know that there are already dissenting voices in the Tax Administration who consider that this rule would not apply to the reversal of impairment losses in respect of participations, from the entry into force in 2008 of the new wording, or at least not to those contributed under a tax deferral regime.

Your Taxand contacts for further queries are:
Vicente Bootello
T. +34 91 514 52 00

Jos? Ignacio Ripoll
T. +34 91 514 52 00

Taxand's Take Author