The Supreme Court has set the rules of the game in the case of contributions made by one of the spouses to a community property company (sociedad de gananciales). It considers that they cannot be dissolved fraudulently
The judgment is a blow to the use of community property companies to pay less tax.
The judgment is dated last 23 December. And it is a blow to the use of community property companies – one of the property regimes a married couple can use – to pay less tax. The Supreme Court, specifically, regards as fraud the contribution made by a spouse free of charge to a community property company that barely a week later is dissolved with the sole aim of saving the payment of gift tax.
The judgment – which resolves an appeal in cassation for the unification of doctrine – refers to a case in which a couple executes a public deed of marriage settlements (capitulaciones matrimoniales). Once constituted, one of the spouses contributes to the community property company some real estate and a sum in cash. Two days after the deed is executed, the marriage takes place, but five days after the wedding the new company is dissolved.
The Supreme Court holds that “it cannot be accepted” that there is a contribution to the community property company when the latter – “by its very nature” – is “lasting” over time, and is therefore not a mere legal instrument to pay less tax. That is, something like a shell company. Without going into the merits, it declares the appeal inadmissible because the assessment of the evidence belongs to the trial court.
Community property companies are those that arise when, upon marriage, the assets acquired during it belong to both spouses
The case has its background in a judgment of the High Court of Justice of Galicia that dismissed an administrative appeal filed at the time against a decision of the TEAC (Central Economic-Administrative Tribunal). And the proven facts narrate that the person ordered to pay tax contributed “free of charge” to the future community property company the dwelling that would be the family home of the future spouses and their daughters, a garage space and €1.65 million in cash. That contribution was conditional on the celebration of the marriage within a year, and that is what was done in October 2005, without that time having elapsed under the community property regime. However, five days after the wedding, both spouses again executed a public deed, but this time of dissolution of the community property regime, the wife being allocated the real estate and €600,000, while the husband took €1.05 million in cash.
That operation was detected by the Tax Agency, since the declarants considered themselves exempt from payment of the Transfer Tax and Stamp Duty. As a result, the inspection issued an assessment under Gift Tax, and the outcome was the opening of a tax file with a taxable base of €1.05 million, which is what the spouse had received before the dissolution of the company.
The appellants had considered that the contribution of assets to the community property company “cannot be regarded as a donation”. The Supreme Court, however, holds that it does not comply with the law when there is an immediate dissolution without “a reasonable explanation” in between, and that in the dispute “none has been offered”.
Free of charge and for consideration
According to Alejandro del Campo, lawyer at the firm DMS Consulting, the judgment is consistent with what several queries made in recent years to the Directorate-General of Taxes establish, the latest in 2012. In one of them, it is recalled that contributions of assets or rights to the community property company can be of two kinds: free of charge, which are those that involve no consideration, and for consideration, those that give rise to any type of consideration.
The tax treatment of both transactions differs depending on their nature. Thus, the donation of assets to the community property company is a transaction subject to the Inheritance and Gift Tax, with the rules of that tax providing no relief of any kind for this type of donations. And this is the case dealt with in the Supreme Court judgment for the unification of doctrine.
Community property companies are those that arise when, upon marriage, the assets acquired during it and those specifically contributed by both spouses are the property of the marital partnership, without distinction of individual shares or quotas. That is, the patrimonial assets belong to the partnership and not to the spouses individually, except those of a separate nature, such as inheritances or those acquired before marriage. Therefore, neither spouse can individually exercise property rights. They can only materialise when the community is dissolved, but without fraud of the law.