Legal articles

The Grouping of Companies and its Interest

As the doctrine has repeatedly made clear, there is no concept of a unified group of companies in Spanish law, and it is also complicated that such total unification will occur in the future, since the requirements to consider the existence of a group of companies for certain purposes (for example, corporate) are due to different reasons from those necessary to consider it for other purposes (for example, for tax purposes or for labor purposes), resulting – besides – that the existing definitions are not accompanied by internal regulation of the phenomenon, but they are mainly due to legislative protection purposes to third parties.

However, in general mercantile terms, the definition of a group (Article 42.1 of the Commercial Code) constitutes the fee to which the regulations that discipline specific sectors within the commercial sphere are remitted, such as the company (Article 18 of the Capital Companies Law), the bankruptcy (Additional Provision 6 of the Bankruptcy Law), or that of the securities market (art. 5 of the Securities Market Law). Such group definition is based on the concept of “control” – there is a group when one company has control of another or others – without the legislator being able to define, in turn, what this control consists of, although it establishes the presumption iuris tantum of existence of such control when the dominant company holds, directly or indirectly, the majority of the voting rights of the dominated company, or has the direct or indirect capacity to appoint the majority of the members of its management body. Although the precept literally states that there is a group when the dominant society “holds or can hold”, we have omitted this nuance, since all societies can potentially hold control of another or others (it is enough to acquire the necessary social participation), but obviously this potentiality can not be included in the definition of a group of companies.

The control criterion adopted by Article 42 CCo refers directly to the relationship of subordination or vertical between the companies that make up the group, with a dominant company and dominated companies; Therefore, it implicitly excludes the formation of groups in a coordination or horizontal relationship between the societies that make them up. Within the relationship of subordination, control seems to be appreciated through the criterion of majority participation in the capital of the dominated company. But this does not mean that the criterion of unit of decision has to be discarded; On the contrary, this criterion can support by its own means the qualification of a group of companies as a corporate group.

As mentioned above, article 42 CCo presumes iuris tantum that there is control – and therefore a corporate group – when the dominant company holds the majority of the voting rights of the controlled company. However, the presumptive nature of such a qualification necessarily implies that not all the relationships of majority participation, direct or indirect, should be classified as groups. In effect, the norm seems to require an additional component to the mere majority participation; said component being its control, or rectius, the decision unit between the dominant and the dominated. Consider that, if this additional component were different from the decision unit, it would not make sense for the group of companies to be required to consolidate annual accounts.

The criterion used by Article 42 CCo partially translates into Spanish law the notion of “related companies” included in article 3.3. of the Commission Recommendation of May 6, 2003, on the definition of micro, small and medium-sized enterprises, excluding the presumption of existence of a corporate group in the event of exercise of dominant influence of one company over another based on a contract or in a statutory clause; in which case, the burden of the procedural evidence (onus probandi) on the existence of control will fall on whoever alleges its existence.

hus, in the Spanish internal order will qualify as a corporate group, with all the legal consequences that this may entail, to the relationship between a majority owned by another, unless the interested party demonstrates that, although there is such majority participation – Objective and easily demonstrable element – there is not, on the contrary, a unit of decision, which turns out to be an element of more arduous and subjective demonstration for a third party litigant. Thus, it seems that the legislator, through such presumption iuris tantum, seeks to protect or defend such third party that alleges the existence of a corporate group to defend their interests, as it will estimate its existence provided that the majority participation is proved, either directly or indirect, in the dominated society. And if any of the companies of the group discusses such qualification, on it will fall the proof to demonstrate that the necessary unit of decision does not exist. Therefore, the nuclear concept of “unity of decision” resounds in silence – or is conspicuous by its absence – since, although Article 42 of the Commercial Code does not use this expression, or even suggest it, it seems that the straight line interpretation of the precept has to travel that motor axis, which imbues and is inherent to the whole notion of “group of companies”

In line with the foregoing, the existence of a corporate group (a) will be appreciated when the majority share of the parent company in the dominated company, and the decision unit between both; (b) when only the majority participation is present, if it is not possible to prove that there is no decision unit between the parent company and the parent company; and (c) when, in spite of the lack of majority participation, the interested party is able to prove the existence of a decision unit, no matter how small the assumptions in which this may occur may appear. In assumptions (a) and (b), the rule presumes that the majority participation entails the imposition of the business criterion of the majority shareholder – which is absolutely lawful as long as said criterion is not imposed abusively – while in the case (c) the unit of decision, in the absence of participation that supports it, can be based on statutory provisions, on parasocial agreements, or on the so-called “domination contracts” (unrelated to our legal system, but recognized in legal systems such as German or Brazilian), or in any other legitimate form of dominative control not based on a majority stake in the share capital.

Of course, they always plan on the vertical or control group relationship both (a) the external risk of derivation of responsibility towards a third party from a subsidiary to its majority partner or even to the head of the group, such as (b) the risk internal due to the legal remedies that the minority shareholders have against strategic decisions of the parent company that adversely affect the subsidiary in which they participate.

At least the doctrine of the lifting of the veil should be cited – if there is patrimonial confusion between the societies of the group or animus fraudandi of any of the societies of the group – of the doctrine of the administrator of fact, of the doctrine of the appearance, or even the doctrine of improper solidarity based on the community of interests, which would be available to third parties harmed by one of the group’s companies. However, the degree of involvement of the parent in the management of the subsidiary that could cement the identification of the former as a de facto administrator remains an open question. A reasonable position would be to consider that as long as the parent’s influence on the subsidiary is limited to designing the strategic coordination of the company with the rest of the group, without carrying out day-to-day management actions specific to its management body, there would be no basis to designate to the matrix as a de facto administrator.

Regarding internal risk, this naturally arises from the possible breach of fiduciary duties owed to the minority shareholders of any of the companies that make up the group, which have a dual aspect (a) the fiduciary duties of the parent company in the adoption of board agreements (article 204.1 LSC), and (b) the fiduciary duties of the administrators of the subsidiaries (article 227 LSC). The former will prevent the matrix from adopting decisions – even within the framework of strategic and organizational coordination – that are abusive because they clearly prejudice the interests of the members of a group company, who as third parties possessing legitimate interest will be entitled to to challenge the resolutions of the parent company that adversely affect their interests. The latter will prevent the administrators of the dominated society from breaking their obligation of loyalty and their duties of independence and acting in the best interest of society against the partners (our order, unlike the German, does not know any exception to this duty fundamental), so they can not execute orders imposed by the majority partner – the dominant company – that has appointed them to the position, if they contravene in the social interest; the partners were entitled to exercise the social actions of responsibility against the administrators that proceeded (articles 238 and 239 LSC).

In light of the above, and in the absence of substantive precepts that discipline intergroup relations between the dominant society and the dominated societies, it is questionable whether it will be possible in law to implement even a strategic and organizational coordination common to the group, established by its matrix, that responds to its legitimate economic interests and that inevitably produces a negative externality to one or more of the dominated companies; and that, at the same time, is opposable to a possible legal action of the injured partners.

The jurisprudence has addressed this question in the Supreme Court Judgment of December 11, 2015, noting that a balance could be found between the damage caused to the dominated company and the logical power of its parent company to establish guidelines for organizational coordination, through the receipt by the injured company of the so-called “compensatory advantages” that can be materialized in the aliquot part of the overall benefit received by the group of companies – the result of the action that in the first place has harmed the dominated society – or in another type of advantages and benefits that would not occur if the damaged company does not belong to the group of companies (ubi commoda ibi incommoda) so that such benefit compensates, at least, the damages derived from the decisions of the parent regarding the organization and objectives of the group of companies.

By reproducing the most significant expressions of the aforementioned Judgment, suffice it to say that although his text begins by severely recalling that

The right administrator of the subsidiary has its own area of autonomy of decision that can not be affected by a kind of “due obedience” to the instructions of the group administrator that unreasonably harms the interests of the society it administers, for which has to watch.

it then goes on to recognize a possible “justification” for the damage suffered by the dominated company, which would happen because the damage did not jeopardize the existence or viability of the dominated company, and that it would receive

(…) compensatory advantages that justify that some action, considered in isolation, could be a detriment to society (…)

The aim is to make a balance of the advantages provided or the benefits made in both directions (from the company to the group and from the group to the company) and to conclude whether or not there is a negative result for the subsidiary. (….)

In any case, they must have an economic value, and be proportionate to the damage suffered by the subsidiary in the action for which liability is required (…)

As a conclusion of these very brief lines on this complex and unknown subject for our positive law, it can be affirmed that (i) the content of the concept of “control” used by article 42 CCo is none other than the “management unit” understood as strategic and organizational coordination imposed by the parent company on the group’s subsidiaries, “management unit” that could be implemented by any means, even though the most common – by far – the majority shareholding, and that (ii) although the interest social prevails over the interest of the group, jurisprudence does not seem to sanction the damage suffered by a subsidiary if it receives an objective “compensatory advantage” and derived exclusively from the affiliation of the subsidiary company to the group.

César Ayala
1 October, 2018
group, grouping, interests, spanish laws, subsidiary

The Registration of the Reservation of Title over Inmovable Goods

The Directorate (CD) has resolved on November 28, 2017 (BOE 14.12.2017) an appeal lodged by the notary granting a deed of sale of property with deferred price, against the calification note issued by the Registrar of the Property for which he suspended his registration, because the guarantee for the price that was postponed had been configured between the parties by means of a pact of reservation of title over the property.

The Directorate profusely deals with the nature of the domain reservation agreement, and rejects the four arguments of the Registrar that substantiated its calification note:

1 The Registrar argued that, since there would not have been a transfer of title, there is no modification of any real right to register in the Registry, in accordance with the provisions of Article 2.1 of the Mortgage Law (LH); also adds that the material result of the pact would be equivalent to the pacto comisiorio, forbidden in Spanish law, since, in case of non-payment of the deferred amount, the seller would recover full ownership of the property without liquidation and without public procedure for setting the price .

The CD inadmits this line of argument referring to the jurisprudential recognition of the pact of reservation of title (STS 12.03.1993) and the possibility also admitted jurisprudentially that the autonomy of the will modulate the purchasing regime of property (Article 609 CC), provided that said will does not imply a contravention of the law, morality or public order (STS 20.06.2000); and although it is true that in the presence of the pact of reservation of title there is no transfer of title, it is also true that such pact generates quasi-real effects (ius ad rem) that must be reflected in the registry, such as the prohibition of disposal of the owner and the best right that assists the buyer before a seizure of the property by the seller’s debts (STS 16.03.2007).

With reference to the identification of the pact of reservation of title with the pacto comisiorio, would be valid also the argument of the CD, because although this is prohibited in defense of the debtor, the pact of reservation of title is admissible, admissibility fruit of the different nature legal status of one institution and another. In addition, the pacto comisorio assumes the direct appropriation by the creditor of the property offered as collateral by the creditor, prohibited by the order for the quantitative difference that may exist between the debt and the value of the collateral, and by the absence of auction mechanism that objectivize such value, being able to produce unjust enrichment for the creditor. However, (i) the title reservation agreement does not imply the appropriation of the guarantor, since it never left the creditor’s estate; and (ii) the valuation of said good is the equivalent of the purchase price freely agreed between the parties, a price that has been postponed and unpaid; and if it were the case that the buyer had delivered some amount to the seller, the reimbursement of said amount must be accredited as a condition for the registration of the ownership of the buyer, in accordance with art. 175.6º of the Reglamento Hipotecario (RH).

2º The second objection raised by the Registrar is that, at its discretion, compliance with the payment obligation cannot condition the transfer of ownership, since the payment is an essential element of the contract of sale and is not reducible to the category of suspensive condition (distinction between conditio factii and conditio iuris), for which reason we would not be faced with a condition on which the consummation of the business depends, but rather with an “agreed modalization of the effects of the business”. However, this reasoning is rejected by the CD in voluntarist terms of jurisprudential origin of protection to the creditor (STS 12.03.1993), and in the very assumption that the fullness of the transmissive effect may be subject to full payment of the price (STS 24.07.2012).

3º The third argument put forward by the registrar refers to the availability of means expressly provided for and regulated in the legal system (Article 11 LH) that produce the same effect, such as the resolutory condition established in Article 1.504 CC. At this point, the CD refers to its resolution DRGN of 12.05.2010 and collects an illustrative doctrine about the character of numerus apertus of real rights, which we transcribe in its entirety:

“(…) As this Directorate has repeatedly pointed out, it is undoubted in our Order that the owner can dispose of his assets, and, therefore, constitute liens on them, without further limitations than those established in the laws (article 348 of the Civil Code). Not only is it possible to establish new real property rights not specifically provided for by the legislator, including any act or contract of an unnamed nature of real significance that modifies any of the powers of ownership over immovable property or inherent rights (see articles 2.2. º of the Mortgage Law and 7º of the Reglamento Hipotecario), but also the alteration of the typical content of the real rights legally foreseen and, in particular (articles 647 of the Civil Code and 11, 23 and 37 of the Mortgage Law) subject them to condition, term or mode. But it is also true that this freedom has to conform to certain limits and respect the structural norms (imperative norms) of the legal status of property, given its economic-political significance and the “erga omnes” transcendence of real rights, so that the autonomy of the will must be tempered to the satisfaction of certain demands, such as the existence of a sufficient justifying reason, the precise determination of the contours of the real right, the inviolability of the principle of freedom of traffic, etc. (Resolutions of June 5, October 23 and 26, 1987 and March 4, 1993, among others).

Indeed, although the condition of termination and the covenant of reservation of title have the same protective purpose of the creditor in case of non-payment of the deferred price, the legal effects pending from one and the other differ essentially, since while in the first case the transfer of title has been full, and therefore the property can be transmitted and seized by the buyer’s debts, in the second case neither the buyer nor the seller can transmit the property, and the action of the creditors of each of them is limited to their own rights. Therefore, the legal regulation of the business must be left to the autonomy of the will while the condition is pending compliance – whether it be suspensive or resolutory – and the deadline for compliance has not elapsed.

4º Finally, the CD also does not accept the rejection of the registration to the registration based on the specialty principle of the property registers, because of the indeterminacy over the domain that the reservation pact originates while the condition is pending compliance . However, for the CD, there is no problem of any ownership indeterminacy since during the pendente conditio period there coexist two opposing but complementary rights, which exhaust the full ownership of the property: the first is current and the second expectant or latent (ius ad rem), and after said period the consolidation of the full domain will take place in favor of the party that duly certifies that the result of the condition was produced in his favor (RDGRN 12.05.2010).

To conclude this brief note, we must point out in practical terms the equivalence of the pact of reservation of title and of the resolutory condition in the registration and insolvency fields, and its substantial difference in the tax sphere:

(A) Regarding the registry regime, it is important to point out the equivalent treatment of the resolutory condition and the domain reservation pact imposed by article 175.6º RH, when, as a result of each one of them, the full domain is reassigned to the seller. In such cases, the registration will be conditioned to the reimbursement to the buyer of the amounts paid.

The quoted registry provision is projected in the private obligational scope by preventing compensation between the necessary reimbursement to the buyer and the possible penalty clause that could have been agreed between buyer and seller in the event that the former did not pay the deferred payment. In this case, the seller is not exempt from making the refund to the buyer of the amounts that could have been paid under the justification that they would have been automatically compensated with the amount of the penalty; but it will undoubtedly have to reimburse them to the buyer so that the registration of their right takes place; This is without prejudice to the fact that – subsequently – the seller may claim the penalty from the buyer through a declaratory procedure, fully subject to the rules on the matter, including the power of judicial moderation of the penalty.

(B) With regard to the bankruptcy sphere, it is only necessary to point out that both the resolutory condition expresses and the pact of reservation of title produce the qualification of the secured credit as specially privileged (Article 90.1.4 LC), with all the consequences legally planned.

(C) Finally, within the tax sphere, two important issues should be noted. (i) although the consolidation of the right of full ownership occurs at different times, the ITP derived from the transfer of ownership will be accrued, both in cases of express condition and as a result of the reservation of title, at the time of the transmission of the good. (Article 2.3 RH, concordant with article 75 of the Law 37/1992 of the VAT); and (ii) although the registration of the resolutory condition is subject to taxation of ITP (Article 7.3 ITPAJD Law) or AJD (Article 73 RITPAJD), it is much more doubtful that the constitution of a domain reservation agreement is subject to to said tax. (Article 7 ITPAJD Law and Article 31 of the RITPAJD).

César Ayala
4 March, 2018
property register, reservation of title, spain

Short comments about managers liability arising from 367 LSC

One of the main risks of the management body of a capital company, whether individual (sole administrator), shared (joint or several administrators) or collegiate (board of directors) is the potential joint and several liability for company obligations arising after the concurrence of a legal – non-statutory – cause o company dissolution, which is imposed by article 367 of the Capital Companies Act (LSC), for cases in which after said cause, the organ (i) does not convene within the term of two months the general meeting to adopt, where appropriate, the dissolution agreement or the voluntary bankruptcy if the company was insolvent (Article 365 LSC); or (ii) does not request judicial dissolution or, if applicable, the insolvency of the company, within two months from the date scheduled for the meeting, when it has not been established, or from day of the meeting, when the agreement would have been contrary to the dissolution.

The sanction to the administrative body does not cause the violation of the duty of diligence in the management, as in the case of company action (Article 238 LSC) or individual (Article 241 LSC) of responsibility since the object of protection is not they are the interests of the partners, but that of the company creditors and of the commercial traffic itself, which harms the existence and performance of a paralyzed, decapitalized or insolvent society that contracts obligations – whether contractual or extracontractual (STS 10.03.2016) – whose compliance is seriously compromised because of that state. However, the duty of diligence of the administrators requires them to have correct knowledge of the situation of the company (Article 225 of the LSC), which implies knowing their financial status at least on a quarterly basis (Article 280 CCo).

The nature of liability for debts has been doctrinally classified by the Supreme Court as an ex lege responsibility for another’s debt, and not as a contractual or tort liability [with the consequence that, in the event of bankruptcy of the administrator, the credit will be qualified as pre-deductible or against the mass (STS 16.11.2017)] and in spite of its severity the Courts have to apply it strictly (STS 18.01.2017), and it can be imposed on the de facto administrator (STS 18.07.2017) and even on the individual representing the administrator legal person (article 236.5 LSC and SAP Álava 29.12.2016).

The seriousness of the consequences of the exercise of the action for debts makes importance to the substantive exceptions that can – in its case – make it decay before the Courts. Such exceptions are of a heterogeneous nature and fundamentally refer (i) to the moment of the birth of the company obligation, (ii) to the period of birth of the company obligations, (iii) to the removal of the cause of dissolution, (iv) to the term of limitation of the action for debts, and (v) finally to the abuse of right of the creditor.

(I) In reference to the moment of birth of the obligation, which should be directly related to the moment of concurrence of the cause of corporate dissolution, the jurisprudence of the Supreme Court has indicated that the obligation arises when it is constituted according to law, and not when it becomes due, liquid and due (STS 01.03.2017); with the important qualification that if in the constitution of the obligation it is subject to a condition precedent, it will be understood as born at the moment in which the condition that activates it is fulfilled (STS 08.10.2014), and if it is submitted to a resolutory condition, it will be understood as born at the moment in which the resolution originates the consequent obligation of restitution (STS 10.03.2016). Even so, the genetic moment of the unfulfilled obligation by society must be addressed, without the possibility of going back to a pre-existing obligation that caused the breached obligation – unless they are intrinsically related – otherwise the antecedent obligation would be excessive. constitutive moment of this (STS 01.03.2017) to the detriment of the interests of the company creditors, whose possibilities of action against the administrators are reduced the more anticipated the date of constitution of the unfulfilledcompany obligation. This is, for example, the case of procedural costs, which are not considered intrinsically linked to the obligation that has generated the litigation, and whose payment is a company obligation that is considered to have been born at the time when the Sentence that imposes them (STS 29.11.2017); although not that of the default interest accrued by an unfulfilled company obligation, which are considered born at the time of the obligation that they bring cause because they are very strongly linked to it (STS 10.03.2016).

(II) In reference to the period of birth of the company obligations for which the administrator must respond, it should be noted that they must be understood to be limited to those contracted by the company in the event of dissolution during the exercise of their position. In this way, the administrator will not be held responsible for the obligations arising after he has ceased to hold office, despite the fact that the breach of the duty to promote the dissolution and liquidation of the company due to the legal cause of dissolution has taken place. in force his appointment (STS 14.10.2013 and STS 02.12.2013), having to consider that the date of cessation in the position is that of his effective removal and not that of its registration because it has merely declaratory, non-constitutive effects (STS 19.11 .2013).

(III) In specific reference to the cause of dissolution for losses that reduce the equity to less than half of the share capital, it must be considered that the administrative body does not incur any liability if it timely remedies this reason through the appropriate increase or reduction of the company capital within the period of two months granted for the convocation of the general meeting with a dissolving purpose. Although this possibility is not expressly foreseen, the company responsibility of the administrators has been ruled out by the untimely removal of the aforementioned cause of resolution with respect to the obligations arising after the removal (STS 14.10.2013), so it should be understood that the timely rectification must exonerate the management body that corrects the cause of dissolution even more with due reason even before the expiration of the two-month deadline whose overcoming carries the joint and several liability. Although for the rest of legal causes of company dissolution the possibility of timely or untimely correction is not contemplated, no reasoning is found – coherent with the purpose of the norm – that would prevent the exonerative appreciation of its removal.

(IV) In reference to the limitation period for the action for debts, it should be noted that although the term of four years established by article 241 bis LSC refers only to the corporate action and the individual action of liability, it seems that four-year term is also applicable to the action for debts of article 367 LSC (SAP Barcelona 27.09.2017), which implies that for its calculation the dies a quo will be set on the date on which the action had begun to be exercised – general criterion of actio nata (Article 1969 CC) – a transcendental issue, since such criterion deviates from the one established by Article 949 CCo, which establishes the dies a quo on the date on which the administrator ceases. Although, in general terms, the criterion of the date of cessation is more disadvantageous for the administrator, it could be circumstantially beneficial if the company creditor could not legitimately know the existence of the violation of the duty to promote company dissolution.

(V) Finally, the liability action for corporate debts is dismissed by the Courts, in application of Article 7 CC, if its application involves abuse of right because the creditor has known the cause of dissolution of the company at the time of having constituted the obligation (STS 22.11.2006), or by participating directly in the omission of the duty of the board of directors to call a meeting of shareholders (STS 18.06.2012), or by having caused the debtor company’s undercapitalization with its conduct it falls in cause of dissolution.

Division of Companies and Insolvency Claw-Back Actions

The Judgment of the Supreme Court of November 21, 2016 (rapporteur Ignacio Sancho Gargallo) addresses several matters while resolving the ability of a rescissory bankruptcy action to deprive an effective structural modification such as the división of companies. Therefore, reading this resolution becomes an interesting legal excursion through the domains of corporate law and bankruptcy law.

The insolvency administrator of a spin-off company files a bankruptcy insolvency incident in which he exercised the bankruptcy rescission action against the transfer of assets that led to the spin-off. As will be remembered, the división, or split, is the universal transfer of an economic unit of the spun-off company to the beneficiary company in exchange for shares or social participations of the beneficiary company payable to the partners of the spun-off company. In the case of the spin-off, the potential asset depletion that may occur is more severe than in cases of segregation, since in the latter case it is the segregated company itself that receives the equivalent of the value of the transferred equity in the form of titles representing the capital of the beneficiary company.

The split continues the legal regime of the merger, and therefore its registration registration shields it against any action of challenge other than that of its nullity based on the infringement of the procedure provided for in art. 47.1 of Law 3/2009 on Structural Modifications of Capital Companies (LME). For this reason, the insolvency administrator argued that what was challenged – in fact – was not the split, but the transfer effects of the same as they affected certain properties transferred by the company spun off to the beneficiary company.

The insolvency administrator is obliged to ensure the integrity of the active mass of the bankruptcy, and for this purpose he will be obliged to exercise the rescission actions and other challenges that may arise, in trusteeship of the rights of the creditors. Although the judgment does not extend to this, it seems that the creditors did not formulate in a timely manner the right to oppose the merger granted by the LME; and for this reason, there are no procedural obstacles that can sustain the challenge of the split once registered in the Mercantile Registry. It could be considered that, in this particular case, the creditors waived their right to oppose the spin-off until the spin-off company had adequately guaranteed the collection of their credit (Article 44.3 LME); and that – therefore – their credit rights enjoyed the due protection prior to the exercise of the bankruptcy rescission.

The acting insolvency administrator does not contest the division agreement, but the transfer effects derived from it. However, the Supreme Court establishes that it is impossible to dissociate the legal business from its effects, given that these are not a consequence of that, nor a sort of reflex or collateral effect, but that the split consists essentially in the transfer of assets from the company spun off to the beneficiary company, and therefore said translation is – in itself – the same split that is incontestable, except for the cause expressly provided for in art. 47.1 SML that enables the annulment action to be exercised (articles 47.2 and 47.3 SML).

However, before reaching this conclusion the Supreme Court stops its analysis in the figure of the termination, and addresses both the distinction between the rescission of obligations and the termination of legal business, as well as the distinctive notes existing between the action pauliana (Article 1111 CC) and the bankruptcy rescission action.

(a) Rescission of an obligation and termination of the integrity of the legal business.

The general regime of the rescission established in the Civil Code admits both the rescission of legal business (Article 1,291 CC), and of singular obligations (Articles 1073 CC and 1292 CC). The consequences of both rescissions can not be the same, since otherwise the distinction between the two categories would not be justified. If the consequence of the rescission of contracts is the reciprocal return of things with their fruits, and the price with their interests (Article 1,295 CC); The consequence of the rescission of the obligations must be the unilateral refund of the specific service terminated.

The Bankruptcy Law, on the other hand, refers to “acts” as an object of rescission (Article 71.1 LC), and difference between refinancing agreements that may be subject to termination, of “business, acts and payments, any be the nature and form in which they were realized “(article 7.1 bis.1 LC), for what seems to exist a legal differentiation between the two concepts. The rescission consequences must, therefore, be different for each category, the termination of the act will suppose the restitution of the benefit object of the act, and the rescission of the integrity of the legal business, the restitution of what each party would have received. However, the letter of art. 73 LC provokes certain ambiguity when it refers to “that the judgment that estimates the action will declare the ineffectiveness of the impugned act and will condemn the restitution of benefits”; although it speaks of an impugned act, it uses the plural to refer to the benefits, which could be interpreted as the mandate of mutual restitution of the benefits proper to the rescission of a bilateral legal transaction.

The High Court invokes its previous Judgment 629/2012 that deals with the bankruptcy rescission of acts of disposition that entail a detriment to the active mass, which can not be equated with the rescission of the entire legal business, with the following words:

The appellant confuses the effects derived from the rescission of a bilateral business, with the effects of the rescission of the unilateral act that involves the payment or fulfillment of one of the considerations of the business. What was the subject of the rescission action was not the contract or business but the act of payment of the beneficiary of the repair and technical assistance service.

The forecast contained in section 3 of art. 73 LC (“The right to the benefit that results in favor of any of the defendants as a result of the rescission will be considered a credit against the estate, which must be satisfied simultaneously with the reintegration of the assets and rights subject to the terminated act, unless the judgment finds bad faith in the creditor, in which case it will be considered a subordinated insolvency loan “), invoked by the appellant as infringed, it presupposes that, pursuant to section 1, which regulates the effects of the termination of the contested act, condemned “to the restitution of the services object of that one, with its fruits and interests”.

If the bilateral contract had been terminated, in that case, its supervening inefficiency would have brought with it this effect of restitution of both benefits, but the termination of an act of unilateral disposition, such as payment, does not entail the ineffectiveness of the business from which it was born. the payment obligation that is intended to be satisfied with the challenged act. Hence, the termination affects only the payment, arising for the recipient of the money paid the obligation to return it, with interest, without losing his right to credit, which is prior to the opening of the contest is considered bankruptcy and it must be recognized by the relevant channel. And, consequently, since Art. 73.3 LC, there is also no bad faith in the recipient of the payment for the purpose of subordinating his credit.

For the reasons stated in this Judgment, it will be in the interest of the estate to rescind the harmful act and not the entire legal transaction. Although in both cases the third party must be reimbursed in the form of a credit, in the case of rescission of the legal transaction, said credit will be charged to the active estate, but in the event of a specific termination of the detrimental act in the form of a right of ordinary bankruptcy credit, if the legal business took place prior to the declaration of insolvency, the credit will be bankrupt, and – as the Judgment points out – it must be recognized by the appropriate mean.

And if the Bankruptcy Administration agrees to exercise rescission actions on singular acts harmful to the estate, and not on the entire legal business in which they are framed; the party against whom the reintegration action is directed should exercise the appropriate counterclaim requesting that, in case the rescission action is considered, the integrity of the legal transaction is declared by the court rescinded, with which the reciprocal reintegration will be considered credit against the estate, unless the Court judges the existence of bad faith, in which case the credit must be classified as a subordinated credit.

(b) Termination effects before third parties

The aforementioned sentence makes a doctrinal statement on the difference of the rescission effects derived, respectively, from the Paulian action – which has limited inter partes effects – and from the insolvency reintegration actions – that have erga omnes effects.

Indeed, the effects of the Actio Pauliana consist in the access of the creditor who invokes it to the assets that left unduly the debtor’s assets; but not in the reintegration of those to the patrimony of the debtor; Therefore, no other creditor can benefit from the restitution of the assets that must never be withdrawn. However, the rescission actions have full effectiveness before third parties, because the assets that unduly left the assets of the insolvent, will be reinstated to this – converted into active assets – for the benefit of all creditors.

In light of this important distinction, the Supreme Court suggests that if the Insolvency Administration had brought a Paulista action, instead of a reintegration action, the insolvency proceedings would have had access to the real estate that went into fraud by creditors of the company’s assets. bankrupt since its effects are not reintegrative – which would mean the dissociation between the split and its translatory effect – but simply enable the creditor (the active mass) to access assets that respond to the fulfillment of the obligations of the insolvent party (Article 1911 DC).

In such a way that the bankruptcy rescission of the split can not be urged without wanting to be ineffective.

On the contrary, as we will see in greater detail, it would be possible that, if the split had been made to illegally defraud the right of credit of some existing creditors then, they could exercise an action to claim the satisfaction of their credits with the goods transferred with the split, without having to cancel the split.

César Ayala
19 November, 2017
bankruptcy, claw-back actions, Companies, Companies, division, split

Claiming to Banks for Mortgage Expenses

The judgment of the the Civil Chamber of the Supreme Court 705/2015 of 23 December 2015 is known to have dealt with numerous issues concerning the conditions imposed unilaterally by banks on consumers in a series of contracts, including Mortgage loans. Under this category, apart from consolidating its well-known decision on the limits to the variation of the applicable interest rate (floor clauses), the Supreme Court considers abusive the clauses that charge to the consumer the costs derived from the mortgage contract.

The basis on which this opinion is constructed is Article 89.3 of the Consolidated Text of the General Law for the Defense of Consumers and Users (TRLGDCU), which qualifies as unfair terms,

en todo caso, tanto “La transmisión al consumidor y usuario de las consecuencias económicas de errores administrativos o de gestión que no le sean imputables” (numero 2º), como “La imposición al consumidor de los gastos de documentación y tramitación que por ley corresponda al empresario” (numero 3º). El propio artículo, atribuye la consideración de abusivas, cuando se trate de compraventa de viviendas (y la financiación es una faceta o fase de dicha adquisición, por lo que la utilización por la Audiencia de este precepto es acertada), a la estipulación de que el consumidor ha de cargar con los gastos derivados de la preparación de la titulación que por su naturaleza correspondan al empresario (art. 89.3.3º letra a) y la estipulación que imponga al consumidor el pago de tributos en los que el sujeto pasivo es el empresario (art. 89.3.3º letra c)

The Supreme Court considers that the nature of the mortgage loan title and its subsequent registration in the Property Registry justifies that the expenses derived from it must be borne by the lender, since it has the principal interest in the mortgage loan, (Article 517 LEC), constitutes the security right (article 1875 CC and 2.2 LH) and acquires the possibility of special enforcement (article 685 LEC).

Regarding the Stamp Duty, and notwithstanding the provisions of Article 68 of the IAJD Regulation expressly designating the borrower as the taxable person, the Supreme Court reasons that, in accordance with Article 29 IAJD, the taxpayer of the tax imposed on the notarial document of mortgage loan must be the persons who request the notarial documents, or those in whose interest they are issued, which are not other than the bank entities, since it is undoubtedly of interest for the bank to issue and register the mortgage, without which the real right is not validly constituted (article 1875 CC).

Provided with such reasonings – as we have said – the Supreme Court declares the abusiveness and consequent nullity of the clause. Consequently, the parties to the contract must reciprocally reimburse the things that had been the subject of the contract, with their fruits, and the price with interest (article 1303 CC), which means that the bank must return the buyer all the expenses of constitution of the mortgage plus the interest produced since its delivery.

Although there has been no divergence of interpretation regarding the fees of a notary and registrar, there is some controversy regarding both (a) the effects of nullity and (b) the nullity of the obligation of the consumer to pay the involved IAJD (Stamp Duty) for the granting of the public deed of mortgage loan.

In relation to the effects of the nullity, it has been pointed out that since no amount is received by the bank (expenses arising from the constitution are intended to be paid to third parties: notary, registrar, taxes, management), no amount must be refunded by the bank. Such an interpretation would, however, render the nullity of the clause absolutely ineffective and innocuous, incapable of producing practical effects, and – therefore – would openly contradict the “principle of effectiveness” which falls within the scope of the public order of Directive 93/13 EEC of 5 April 1993 on unfair terms in consumer contracts, which provides that the consumer must be absolutely free from all effects of unfair terms, as if they had not existed (STJUE of 14 June 2012, Case C-680/10).

Furthermore, the payment of expenses arising from the constitution of the mortgage is not done directly by the consumer to the aforementioned third parties. On the contrary, the banking operation usually consists of a charge to the consumer’s account, as a provision of funds, in order to meet those expenses, so that – whenever the consumer does not have to face such expenses – the material effect of the nullity can not be other than the duty of restitution, by the banking entity , of the said provision of funds unduly charged to the consumer’s account.

But, even assuming that the payments had been made directly to the professionals involved and to the Tax Agency, and therefore the bank had nothing to pay for not having received anything, in the opinion of Edmundo Rodríguez Achutegui, the restitutory obligation would remain yet transformed into an indemnification obligation under article 1.101 CC, based on the damage that the bank has caused the individual to have forced to satisfy those expenses without justifiable cause, which is an implicit contractual obligation arising from the mandate in good faith, in accordance with with the integration rule of the contract set by article 1.258 CC.

As for the attribution to the bank of the duty to satisfy the IAJD for the public deed of mortgage loan, the discussion is more lively since this judicial decision would contravene the wording of Article 68 of the IAJD Regulation. In fact, the case-law of the Supreme Court, up to today’s date, considers that in the case of a mortgage loan, the taxpayer of the IAJD is the purchaser of the residence (the consumer), in accordance with the letter of said precept.

However, there are reasons that can support the interpretation given by the First Chamber in its Judgment of December 23rd, 2015: first, the statutory provision seems to contravene the legal interpretation from the joint construction of articles 8, 15 and 27.1 of the Law of the IAJD, so that the statutory provision would violate the principle of normative hierarchy and therefore would be considered ineffective before the Courts (article 6 LOPJ). Secondly, as the TS Judgment states, the fact that the purchase and sale of the real estate and the mortgage loan are done simultaneously, does not make the purchaser of the dwelling the purchaser of the real mortgage right, which continues to be the Bank entity, as it is concluded with the expression “the lender entity does not remain outside the taxes that could be accrued by reason of the operation”.

And, apart from the foregoing, the interpretation contained in the Judgment of December 23, 2015 should prevail over what was decided by the Supreme Court on previous occasions with respect to the AJD taxable person – at least in respect of loans in which “Since as established by the High Court itself in its Judgment dated May 18, 2009,” a single Judgment of the First Chamber of the Supreme Court (whether or not the Plenary of that Chamber) may have binding force as jurisprudential doctrine for the Court itself and the other civil courts, as happens with the proper motivation to change the previous jurisprudence (however reiterated) and sets the new doctrine ”

Lastly, and although it refers to the purchase and sale (and not to the mortgage loan) we should point out that, as far as taxes are concerned, it seems indisputable that the clause by which the bank attributes the payment of the tax on the increase in the value of urban grounds (Plusvalía) to the consumer is absolutely nil, by displacing on him an obligation that is strictly owned by the selling banking entity, which has benefited from such revaluation, without being able to justify, on the part of the entity, that such displacement has as consideration a reduction of the selling price (SJPI Oviedo December 9, 2016).

Finally, the radical nullity of the clause of attribution of expenses based on article 83.1 TRLGDCU and of article 6.3 CC, which is different from the mere annulability, allows the imprescriptibility of the actions to declare it. However, as long as the TRLGDCU restates Law 26/1984 of July 19 General for the Defense of Consumers and Users – which is the text that declares the abusiveness and consequent nullity of the clause of attribution of expenses – the nullity action of Clauses signed before that date would be impossible because the rule allowing it had not yet been approved.

Unconstitutionality of the Municipality Plusvalue

The judgment of the Constitutional Court dated May 11, 2011, states that arts. 107.1, 107.2 a) and 110.4 of the Local Finances Law, are unconstitutional and void, but only when taxing situations of non-existence of increases in value.

The plusvalue tax charges the increase that has occurred in the value of urban land, as established in Articles 104 and 107 of the Ley de Haciendas Locales. However, the way of determining the tax base and the tax quota established by the Law does not take into account whether there has been a real increase in value or not, but it is based exclusively on the value of said land at the time of transfer. This implies that it actually taxes transfers in which there has not been any increase in value at all. The judgement understands that in such cases, they are being taxed situations in which there is no economic capacity, being, therefore, contrary to art. 31.1 of the Spanish Constitution.

These are the conclusions of the Judgement:

The tax on the increase of the value of the land (plusvalue tax) is not, in general, contrary to the Constitution. It is only in those cases in which it taxes situations which does not show economic capacity, that is, those that do not present increase of value of the land at the moment of the transmission. Accordingly, they must be declared unconstitutional and null and void articles 107.1 and 107.2 (a) only in so far as they tax situations which do not show of economic capacity.

110.4 is also declared unconstitutional and null, as it prevents the taxable persons to prove the existence of an inexpressive situation of economic capacity.

The way to determine the existence or not of an increase susceptible of being taxed is something that only corresponds to the legislator, in its freedom of normative configuration, from the publication of this Judgment, carrying out the modifications or adaptations in the legal regime of the tax to allow a way not to tax the situations of non-existence of increase of value of the lands of urban nature.

The judgment says nothing of the cases in which the increase in value has been minimal, but that, by application of the rules for determining the quota, the resulting amount to be paid for the tax is greater than said increase in value or represents a Very high percentage of it. In this case it could be argued that a confiscatory effect would be occurring, also prohibited by art. 31 of the Spanish Constitution.

3.- CLAIM OF THE TAX

3.1. WAY OF PROVING THE INEXISTENCE OF INCREASE OF VALUE.

First, the judgment establishes that the way in which the existence or not of an increase susceptible of being taxed can be ascertained, is to be decided by the legislator. Therefore, the state legislature is obliged to introduce the relevant regulatory changes so that the municipal tax does not entail non-expressive situations of economic capacity, and to establish the applicable criteria to determine whether or not there is an increase in value.

As long as the relevant normative changes do not take place, the judgment has full effects, as established in art. 164 of the Spanish Constitution, so it must be applied by the Public Administration, in this case, by the municipalities.

In order to prove the non-existence of an increase in value, and until the legislative change imposed by the judgment is made, a mere reference to the number documented in a public deed on the difference between the value of purchase and subsequent sale would not suffice, if we take into account the different judicial pronouncements to date. The safest way to prove the objective values of the land at purchase and at sale is a report by an expert surveyor.

3.2. WHEN IS IT POSIBLE TO APPEAL THE TAX LIQUIDATIONS IN CASES IN WHICH NO VALUE INCREASE IS POSSIBLE. TERMS AND PROCEDURE.

The procedure and deadlines are different if the City Council has issue the tax liquidation, or if the tax has been liquidated by the taxpayer.

A.- LIQUIDATIONS ISSUED BY THE TOWN COUNCILS.

They can be appealed in front of the Council within one month from the date of notification of the liquidation issued by the City Council. Those liquidations issued by the Town Council not appealed within one month, are firm and can not be appealed.

If such a claim is dismissed by the City Council, it can be appealed in Court within two months from the dismissal.

Mandatory payment until the appeal is resolved.

It is a principle of Spanish administrative law that the filing of the appeal does not suspend the obligation to pay the tax.

However, taxpayers can request a deferral or split of the tax claimed, and even request their suspension, providing a guarantee.

B.-LIQUIDATIONS MADE BY THE TAX PAYER.

In these cases, in which the taxpayer has filled the liquidation and paid the tax, it is possible to request a rectification and a refund of undue tax paid within a period of four years from the date of filling of the liquidation and payment

In order to do that, an application must be submitted at the City Hall. If it is rejected, then the decision can be appealed as explained in the previous paragraphs, within one month.

The High Court of Justice of the Canary Islands revokes partially the regulation of holiday homes.

Decree 113/2015 of the Canary Islands establishes a new type of tourist stablishment for extra-hotel accommodation, the holiday home, and approves the Regulation of Holiday Homes tourist letting of the Autonomous Community of the Canary Islands.

The Regulation defines holiday homes as follows: “Dwellings, which are furnished and equipped in conditions of immediate use and which meet the requirements set forth in these Regulation, and which are marketed or promoted through tourist supply channels, to be temporarily assigned to third parties on a regular basis for the purpose of holiday accommodation and for a price. “

The Regulation establishes functional and equipment requirements which are quite simple and basic.

It establishes the following operating regime: “Holiday homes must be fully let out to a single user, who will be responsible in any case of the reservation made, not being allowed the letting by rooms, being prohibited to formalize several contracts at the same time in the same dwelling, not allowing, therefore, the shared use of it “

The Regulation establishes as a requirement for the start of the activity the filling of the corresponding application declaring that the dwelling comply with the legal requirements.

The most controversial point in the Regulation is that it excludes from the scope of the Regulation buildings located in tourist areas, as well as dwellings located in tourist urbanizations or mixed residential and tourist urbanizations.

The High Court of Justice of the Canary Islands (TSJC), in a judgment issued on 21 March, 2,017, has annulled four provisions of Decree 113/2015 regulating holiday homes in the Canary Islands.

The provisions revoked have been the following:

The judgment annuls the provision that excludes from the scope of the regulation buildings located in tourist areas, as well as housing located in tourist resorts or mixed residential tourist resorts, “as it clearly infringes freedom of enterprise and the provision of services by limiting the tourist supply without an efficient justification. The only plausible explanation for this cut-off is that this is to favor the offer of traditional tourist accommodation products mostly implemented in these tourist areas, thereby violating free competition in the provision of services”
The same argument is used by the Court to annul the third sub-paragraph of section IV of Annex 2, saying in the third legal plea in fine: “For the same reason, it should be revoked the third sub-paragraph of section IV of the annex 2 “, which states the following:

IV.- Extremes that must contain the application for the beginning of the activity:

The person who signs it, SHALL DECLARE UNDER THEIR RESPONSIBILITY, at least the following: … “3.- That the dwelling is not located in a tourist area, a tourist development or a mixed residential and touristic area, in accordance with the definitions established in Law 2/2013, of May 29, on the touristic renewal and modernization of the Canary Islands “.

The judgment also annuls art. 12.1 of the decree (operating regime) requiring holiday homes to be sold in full to a single customer and prohibiting the rental by rooms. The High Court understands that: “The administrative intervention in the quality of the product is not justified, and the free supply of services is violated. There is no reason to require a client who only wants to hire a room, to be obliged to assume the cost of renting the whole house, if the owner wishes to offer that service.
Finally, the judgement annuls article 13.3 of the Decree. The provision stipulates that the delivery by the Administration to the operator of the house of complaint sheets, plaque-badge and inspection book shall only be made after fifteen business days, within which period the Council of the corresponding Island shall register ” the information on the tourist letting activity of the holiday home in the General Tourist Registry of the Autonomous Community of the Canary Islands ” As the start of the activity without the mentioned documentation is subject to sanction, de facto, this regulation is distorting the effects of the application by the owner and is submitting the start of the activity to a previous administrative control. And hence the justification of the nullity of the precept.

The Court understands that: “The appeal against Article 13.3, should be accepted as it goes against Article 71 bis of Law 30/1992, in that it deprives the application of its capacity of enabling the start of the activity from the very same day of its filing.

The Government of the Canary Islands has informed that it will proceed to appeal the Judgement.

Elimination of Inheritance tax and donation tax reliefs and allowances to British owners in Spain, after Brexit. The upcomming problem and posible solutions

From 1 January 2015, new inheritance tax laws took effect in Spain, streamlining inheritance and gift tax liabilities for EU and EEA nationals who are non-residents of Spain, bringing them into line with a recent European Court of Justice (ECJ) ruling.

On 3 September 2014, the ECJ held that Spain was not acting in the spirit of the European Union by charging different rates of inheritance tax for residents and non-residents.

At the moment, there are 20 sets of rules in Spain in relation with inheritance tax and donation tax, each one stablishing its own tax rates, allowances and releifs: Each one of the 19 regions of Spain has its own set of rules, and then, there is a general set of rules, which only applies to non residents in Spain which are neither citizens of one of the members estates of the EU or the EEA (European Economic Area).

The tax rates and the releifs aproved by the different regions of Spain are in all cases much more favourable than those stablished in the general sets of rules.
In this article, we study the following questions:
1.- Will British homeowners in Spain continue to benefit from the more favourable tax rates and releifs in relation to inheritance tax after the departure of the United Kingdom from the European Union?

2.- Would it be possible or desirable for British property owners in Spain to take any action before the departure of the UK from the EU in order to reduce or minimize the negative impact that such an exit may have on their future inheritance tax?

FIRST: Will British homeowners in Spain continue to benefit from the more favourable tax rates and releifs in relation to inheritance tax after the departure of the United Kingdom from the European Union?

The question can have a big economic transcendence since there are hundreds of thousands of British who own property in Spain, and in most Spanish Regions the deductions applicable in inheritance and gift taxes are very important.

If we look at the Spanish regions where there is a greater presence of non-resident British owners, we can check the following:

In the Canaries and Madrid there is a tax releif of 99.9% in both taxes for mortis causa transmissions and for donations between spouses and between ancestors and descendants.

In Catalonia there is a 99% releif between spouses on inheritance tax. For ancestors and descendants, the releif is 99% for inheritances of less than 100,000 € and 84,5% for inheritances up to 1,000,000 euros.

In the Region of Valencia, no inheritance tax or donation tax is payable between spouses; Between parents and children there is no tax to be paid for inheritance or donations of less than 100,000 € and there is a 75% bonus for inheritance or donations from that amount onwards.

In Andalucia, there is a tax-free inheritance tax allowance of 250,000 € for direct family members.

On the other side, for non residents who are neither residents of a EU or a EEA member estate, the ISD (Impuesto sobre Sucesiones y Donaciones) on an inheritance could amount, in some cases, to up to 34% of the inheritance, and the tax free inheritance allowance is of only 40.140 € for spouses and for children under 21, and of 23.215 € for older children and for parents.

We next analyze whether the British homeowners in Spain will continue to benefit from the lower tax rates and the reliefs that have been approved by the different Spanish regions, after the departure of the United Kingdom from the European Union.

The better tax conditions currently applicable to residents of EU and EEA Member States will automatically cease to apply to citizens residing in the United Kingdom whenever the exit of Britain of the EU takes effect.

1.- Firstly, if the UK, when leaving the European Union, automatically enters the European Economic Area, British citizens will be able to continue to benefit from tax deductions as before.

The European Economic Area now comprises only three countries: Norway, Iceland and Lichstenstein. If the United Kingdom were to join the EEA, it would ensure that it would continued to enjoy all the benefits of the Internal Market, as well as not having to participate in the Common Agriculture and Fisheries Policy, the Regional Policy and other policies (taxation, etc.) with whom Britain has never feel comfortable.

However, the members of the EEA must assume and abide by all internal market rules adopted by the European Union (the Commission, the European Council, the European Parliament and even the Court of Justice of Luxembourg), without being able to participate in the decision making or to vote.

If the United Kingdom is so sensitive to the EU’s democratic deficit, how is it going to find itself comfortable in a system, such as that envisaged in the EEA, where it will have no choice but to accept rules that it does not vote for?

There are two other reasons that will make it difficult for the UK to enter the EEA. First, the members of the EEA are obliged to accept the free movement of persons without restrictions; and must also contribute financially to an EEA cohesion fund.

In particular, EEA members accept 75% of Community legislation, including the free movement of persons, but without being able to participate or influence on its aproval and development, and would still be obliged to contribute to the EU budget. For the UK, the remedy to enter the EEA would be worse than remaining an EU Member State

2.- Second, it is possible that in the negotiation of the departure of the United Kingdom of the European Union, a specific regime for the British is agreed that maintains the freedom of movement of capital and that prohibits the discrimination by reason of residence between the Citizens of the European Union and citizens of the UK. The judgment of the Court of Justice of the European Union of 3 September 2012, which obliges Spain to apply tax deductions to citizens residing in EU and EEA member states, is based on non-compliance with articles 63 of the Treaty on the Functioning of the EU and Article 40 of the Agreement on the European Economic Area.

Article 63 TFEU provides:

“1. Within the framework of the provisions set out in this Chapter, all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited.

Within the framework of the provisions set out in this Chapter, all restrictions on payments between Member States and between Member States and third countries shall be prohibited”.

The European Court of Justice has ruled in repeated judgments (see, to that effect, Mattner, EU: C: 2010, paragraph 20, and the case-law cited) that the tax on inheritances, as well as the tax treatment of donations, whether they are the object of amounts of money, real estate or movable property, fall within the scope of the provisions of the Treaty relating to free movement of capital.

Consequently, if the EU and the UK would reach an agreement under which the EU provisions on the free movement of capital would continue to be in force for the United Kingdom aswell as the prohibition of all restrictions on movements of Capitals and payments between Member States and the United Kingdom, we understand that the lower tax rates, allowances and releifs that the different Spanish Regions establish in inheritance and gift taxes would continue to be applicable to residents in the UK.

Finally, even if the agreement between the European Union and the United Kingdom mentioned in the previous paragraph were not reached, the Spanish State could legislate in the sense of making the tax deductions enjoyed by residents in member states of the EU also applicable to residents of the United Kingdom. It seems unlikely that Spain will voluntarily agree to apply such exemptions to residents in the United Kingdom; Spain had to be bound by a judgment of the Court of Justice of Luxembourg not to discriminate against residents of the European Union, after being requested by The European Commission, request that the Spanish Government opposed.

In the most likely event that none of the three cases referred to above will be given, the better tax conditions currently applicable to residents of EU and EEA Member States will automatically cease to apply to citizens residing in the United Kingdom whenever the exit of Britain of the EU takes effect.

In many cases it could be very interesting before the departure of the United Kingdom from the European Union that residents in that country donate their real estate in Spain to their direct descendants. This could be done while retaining the right of rent and use of the property.
Considering the value of the heritage, the Spanish Region where the property is located and the increase of value that the patrimony in Spain could had experienced since its acquisition, this measure can bring a very important saving in taxes. It has to be considered that donations are subject to capital gains tax. Therefore, each case should be studied individually by an expert in tax law, to analyze the best solution for each person.

The defenselessness produced by a reason beyond confrontation

Judgment of Plenum of the Supreme Court of 13 September 2016 (Rapporteur: Angel Pantaleon) deserves comment for rescuing a so poorly treated legal institution by case law – as is the unfair delay in debt collection – as well as for the twisted reasoning used by the rapporteur to reach a conclusion seeking material justice, while leaving untouched the established case law on penal clauses.

The merits of the case are these, the parties perfected a private sales contract of an inmovable, payment was agreed in three installments, the last coinciding with the granting of the public deed. The private contract also contained a penalty clause, whereby for each day of delay in the granting of the public deed the seller would pay the buyer the amount of 250,00 Euros. For a number of circumstances attributable to the seller, the granting of the public deed was delayed by 442 days, which entailed an agreed penalty of 110,500 Euros.

Two and a half years after the granting of the public deed the plaintiff brought the claim for that amount. The Court of First Instance gives reason to the applicant on the basis of contractual autonomy and strict compliance with the provisions of the parties to activate the punitive mechanism. The Provincial Court – however – reduces the penalty to 22,100 Euros, based on a heterogeneous argumental battery: basically (i) is considered that the punitive pact did not include the possibility that the amount payable could approach the price of the sale (ii) good faith and prohibition of abuse of rights, and (iii) the general principle that compensation may not lead to an enrichment of compensation.

As can be seen, the Provincial Court does not use the moderating capacity of the penalty that includes the art. 1154 CC – since in this case the unfulfilment of the obligation had been complete and full – but reinterprets the will of the parties and concludes that they did not want that the penalty amounted to as sum comparable with the price of the property itself, and therefore reduces the amount up to 20%. However under this criterion, still does underlay the moderation enshrined in Article 1154 CC.

In light of the foregoing, the plaintiff relies on appeal essentially on the grounds that the judgment incorrectly applied the moderation of penalty under Article 1154 CC, which is contrary to established case law which states that the free autonomy of the parties must be respected, and if the event produced matches with was what foreseen, the penalty has to operate in all its rigor. The defendant challenged the remedy of cassation, repeating the arguments of the appeal and adding a specific one: as the decision of the Court is not expressly based on art. 1154 CC, the cassation brought for infringement of Article 1154 CC can not succeed.

The Court of Cassation confronts a moral dilemma

The Court of Cassation confronts a moral dilemma. The defendant had certain intellectual disability, and certainly the applicable penalty amounts to a considerable amount which, despite foreseeable, the defendant did not foresee. On the other hand, it is true that what happened responds to the agreement, and the agreement – being lex privata inter partes – must be performed in accordance with the provisions of art. 1091 CC.

The Supreme Court delivers a zig-zag judgment: it starts saying that no penalty clause should be moderated when it is expressly provided for the event occurred, as is the case and it is settled in case law on the subject; it continues contradicting itself by stating that when the amount of the penalty exceeds remarkably to the damages actually incurred, it would be possible to moderate that, although in this case no one would make moderation because the defendant had not made any claim in that sense; and finally concludes by referring to an argument that was not even part of the appeal, and that the Court rescues to endorse a decision – in our opinion – which has more to see with material justice and fairness, that with in formal justice and the law.

The Court states that the the action was brought with a delay (two and a half years), and that qualifies it as unfair and contrary to estoppel and good faith neccesary to exercise rights (art. 7.1 DC). The fact that the penalty was not claimed at the enforcement of the former action has created to the defendant a rational conviction that conventional penalty not be claimed. This conviction seems to be subject to judicial review. Estoppel require future behavior consistent with the former.

Let’s examine what happened: (i) the appeal is formulated by the breach of Article 1154 CC and its case-law development, and this approach is logical as the Provincial Court makes an equitable reduction of the penalti, which contextually seems to be covered by that Article ; (ii) opposition to the remedy is structured on a heterogeneous set of reasons already argued in appeals procedures, and moreover it claims that the judgment of appeal is not based on this precept, so that it can not be infringed; and (iii) the judgement summarizes the relevant case law on Article 1154 CC, which coincides with alleged by the plaintiff; but then the Court goes on to examine other considerations to give one of them (the Court seems to care that it has been suggested by the respondent, seemingly to avoid a incongruity extra petitum) consisting of unfair delay in bringing proceedings (the respondent did not even referred to the “unfair delay,” but only to “estoppel” and the Court makes by its own the logical derivation from the second to the first ).

As you can see, it appears that the Supreme Court had decided a priori – and for reasons of fairness – to dismiss the remedy, and had examined various reasons to find a perfect fit for such a decision, yes, clarifying preemptively that the chosen reason was alleged by the defendant (who had not even used that argument at first instance, being imposible to enter it at second instance due to the prohibition of mutatio libelli).

But the plaintiff and appellant has not provided any procedural opportunity to rebut the allegation of unfair delay, which has been finally used by the Supreme Court to dismiss the remedy of cassation. Let’s see: (i) in the first instance it was not used; (ii) it was introduced on appeal out of time – as we said – and the plaintiff had not the opportunity to rebut that argument with evidence (the case does not fall within those contemplated by Article 460.2 LEC of evidence admissibility in the second instance, just imagine that the delay in the claim was caused by a disease of the plaintiff, in this case the component of disloyalty could not be seen, and not to mention that the burden of proof on the “disloyalty ” fell on the defendant); and (iii) is reinserted in opposition to the appeal decision – without the argument has to do with the plea – and the Court consideres it without the appellant has been able to contradict it. This could create – from our humble opinion – A defenseless to the plaintiff and appellant of such significance that could be object of constitutional remedy, by understanding breached constitutional right to effective judicial protection.

Fortunately for the plaintiff and appellant, the Court also finds a reasoning for not depriving to the plaintiff of the 22,100 Euros received, as required by the argumentation used by the ruling, since the effect of the untimely and unfair claim is not reducing the amount requested, but the inappropriateness of the claim itself. However, in the absence of challenge against the order to pay 22,100 Euros by the defendant, the decision about this amount remains unchanged due to the prohibition on reformatio in peius, as the Court reminds extensively to the reader.

César Ayala
16 October, 2016

Just a single transfer? Or several?

Consistency between civil-law and tax-law criteria addressing legal operations is desirable. Such coincidence does not exist in the case of transmissions where the buyer is undetermined. The most common example is the buying and selling of properties in a private document, in which the buyer reserves to himself, by means of a specific clause, the right either to complete the operation or to point a third party to do so in its own name and right.

The civil-law standard on the operation is clear, and laid out in the RDGRN of 11 June 2015 (BOE 178 of July 27). The Directorate decides on the negative qualification note issued by Property Register No. 4 in Ibiza (Balearic Islands), for which is denied the access to the registration of a deed in which the buyer appearing in the private deed appointed a third party which finally acquired the property. The Registrar of Property refused registration because – as explained in his note – in the absence of title and traditio, essential in Spanish law for the transfer of real elements. That is, the Registrar believes that the purchase contract is completed by private writing, which is fixed the subjective element of the contract (the identity of the parties), the objective element (thing and price) and as well as traditio which would have made “brevi manu” or only symbolically.

Such an interpretation is corrected by the Directorate, which accepting the appellant’s arguments notary, reverses the Registrar decision and on the basis that: (i) the principle of contract autonomy (1,255 CC) allows to parties contracting aside from preset models and configuring synallagmatic relationship according to their best common interests; (ii) that the contracts of the kind “designation of a third party” are accepted expressly by analogue legal systems (Italian and Portuguese civil codes) and the Provincial Compilation of Navarra (Act 514) apart from being implicit in our procedural law, which admits, in the enforcement step the transfer of rigths to a third party; and according these, the indeterminacy of a possible beneficiary does not prejudice the completion of the sale contract of , indeterminacy ending with the designation of the beneficiary, with effect “ex tunc” from the moment of completion of the contract, such so that one should consider that the beneficiary has been the contract holder since the beginning; and (iii) it is wrong to consider that there has been no title either way, since the title is the deed of sale, which designates the third beneficiary as a buyer including instrumental traditio, as contemplated by Article 1462 of the Civil Code.

However being provided this solution by the civil law and its interpretation, which is also the one that best fits the rules of logic, the tax system provides an opposite solution and entails adverse economic consequences of great relevant.

In other words, we are not facing two consecutive transmissions, the first from seller to buyer, the second from the buyer to the final beneficiary; but developed through a single legal business and one transmission,registrable in the Land Registry. However being provided this solution by the civil law and its interpretation, which is also the one that best fits the rules of logic, the tax system provides an opposite solution and entails adverse economic consequences of great relevant.

It is consistent interpretation of the Tribunal Económico Administrativo Central (Resolution dated July 20, 1988), that in the development of contracts purchase for a person to designate occur -the least – two legal business: the first transmission from seller to buyer, and the second from buyer to the designated beneficiary. These transmissions are subject to corresponding transfer Tax (ITP). And we say” the least”, because the transfer of the contractual ownership is subject either to ITP, if the transferor has received consideration or to Gift Tax (ISD), if the transferor’s acted gratuitously, usually the norm in this kind of contract. Accordingly, the transaction would be subject to triple taxation, rather than the single taxation of real estate transfers.

In other words, the interpretation of civil law by the Supreme Court, which serves the ultimate purpose of the contract, where the parties involved do not act under a plurality of contracts, but want a single transmission and a single acquirer, leaving this undetermined until the granting of the public deed, is challenged by the interpretation of tax law by the Tribunal Económico Administrativo Central (TEAC) which disregards the supremacy of the legal interpretation by the Supreme Court, in accordance with Article 1.6 of the Civil Code. There is only one transmission. Therefore taxation must be rather one, and not triple.

It is true that under the resolution of the TEAC lives a principle of caution and distrust of the taxpayer, represented by the legitimate suspicion that behind a purchase with “beneficiary designation” may reside actually two successive purchases and therefore animus fraudandi. However, this stance is excessive, since the decision should be taken on a casuistic basis. Otherwise this would prove excessively onerous and hindering of legal traffic.

César Ayala
24 August, 2016
inconsistency, IP, ISD, stamp duty, TEAC, transfer tax, Tribunal Supremo