Catalan tax on non-productive assets

We closed 2019 learning the figures of this pioneer tax in Catalonia that taxes as non-productive assets the properties and luxury assets such as vessels, cars with large cylinder capacity, aircraft, jewels and art and antiques belonging to legal entities for 2017, 2018 and 2019. There were 1,425 taxpayers, 4,000 returns in total and a collection of €2,085,998.56. Perfect. At first sight, these are (ridiculous) figures that show us that the vast majority of companies in Catalonia have hardly any non-productive assets. Great news, but is this tax a good indicator of this reality? The answer is a big no.

Once the constitutionality test was passed, many of us thought that the tax could reach a considerable number of taxpayers, as there are many who put these assets in the name of their companies in the false belief that this will save taxes. However, the reality is otherwise. What failed? Everything points to how the tax has been interpreted and configured: full of inconsistencies.

Firstly, because the Directorate-General for Taxation of the Catalan Tax Agency decided to exclude from the tax companies that do not carry out economic activities or, in other words, holding companies.

The reason for this is that the rule states that taxpayers must have a business purpose, and this has been interpreted to mean that they carry out an economic activity, as defined in the Corporate Income Tax rule. Was it necessary to make this distinction when the law does not? The most illustrative case of this absurdity is represented by the activity of real estate leasing which, due to its specific weight in our economy, has always been the focus of attention by the legislator and the tax administration. In order for this activity to be considered an economic activity, the standard requires that the entity have a person hired on a full-time basis. Therefore, entities engaged in leasing property without employees are excluded. According to data from the INE, this means that nearly 25,000 companies based in Catalonia that lease property do not pay a tax designed to encourage productive and profitable use of the property.

Does an entity that leases real estate not have a commercial purpose simply because it does not have a full-time employee? Don't asset-holding entities act like the rest in commercial trade? Didn't the preamble of the law say that the purpose of the rule is "to reach a certain redistributive level by subjecting legal entities with a greater volume of unproductive assets to a greater tax burden" as well as to enable them to "try to use their assets more efficiently by replacing unproductive assets with more profitable ones"?

Collection has been ridiculous and taxation in practice raises many questions

The category of non-performing assets defined in the standard also deserves reflection. In short, unproductive assets are: (i) assets transferred free of charge to partners (and related persons) for their private use, unless they constitute income in kind for the partner; (ii) assets sold at a price in favour of partners (and related persons) below their market value, unless they pay a market price and they are actually employed by the company and receive remuneration therefor that is higher than the price of the transfer and (iii); assets not used for economic activity, unless (among other exceptions) they have a purchase price that is lower than the entity's reserves (retained earnings), provided that these earnings are derived from the performance of economic activities. Assets used for economic activity are understood to be those which, as a factor or means of production, are used in the operation of the economic activity.

Many questions arise in practice, mainly about the compatibility between the categories, together with the time element. Let's take an example with some issues:

An entity dedicated to leasing with a hired person is the owner of a property in expectation of being leased during the first half of the year, to finally lease it to the partner for the rest of the year at its market value, paying the latter the consideration.

1. Is it an unaffected asset during the first quarter and a possible non-productive asset the rest of the year if, for example, the partner does not work for the company?
2. Or can it be understood that during the second half of the year it is a good subject to taxation, acting as a means of production in the operation of the activity and being an element that generates yields?
3. If it is given free of charge to the partner during the first half of the year (not counting as income in kind), is it directly an unproductive asset by category (i) or can it be defended that it is also an unaffected asset by category (iii)?
4. To what extent is it preferable, from the point of view of tax savings, to keep the property empty (category (iii)) if the purchase price of the property is lower than the amount of reserves originating from business profits? If so, does it make sense and is it in line with the spirit and purpose of the rule?
5. And if the purchase price was higher, would you pay from the first euro or for the excess? How are the magnitudes "acquisition price" and "updated cadastral value" which constitute the taxable base for real estate tax reconciled?

Regarding the exception to the unaffected assets in questions 4 and 5, we return here to the reflection we made at the beginning: this rule for asset-holding entities would never apply, since the reserves would presumably have been generated with profits that do not derive from an economic activity. Did the legislator include this category precisely in order to prevent operating companies from being taxed if they have sufficient reserves from corporate profits? We understand that it is, since precisely this category, according to the preamble of the law, has "a more general scope", but this is not the administrative interpretation.

In my view, a magnificent opportunity has been lost to correct everything that the rule proposed: reducing inequalities, redistributing wealth and promoting economic growth by attending to social principles and purposes, as well as avoiding tax evasion and avoidance practices by transferring personal assets to corporate structures, without forgetting the collection function.

And especially the last one. Despite the fact that the collection of a regional tax is of a secondary nature and that no forecasts were made by the Generalitat, it is hard to believe that the figures collected are up to expectations, especially given the progressive tariff approved and the amendments made to the text of the bill, which eliminated the minimum exemption of 100,000 euros and eliminated the possibility of deducting the tax on empty housing from the quota. A whole declaration of intent that's been left in the lurch.