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Breaking Down the Unconstitutionality of 2016 Corporate Tax Reform

Miguel González 5 February, 2024

The Constitutional Court's unanimous decision (TCo 6/2024) has marked a significant turning point by declaring the unconstitutionality of specific Corporate Income Tax (IS) measures introduced by Royal Decree-Law 3/2016. These controversial measures, aimed at large corporations, involved restrictions on the utilization of negative tax bases, the imputation of allocations for credit impairments, provisions, and deductions designed to prevent double taxation, along with a transitional regime for losses on impairment of securities and negative income from foreign sources.

The challenge to these reforms originated when the Audiencia Nacional questioned their constitutionality, leading to a pivotal review by the Constitutional Court. The Court's findings highlighted a critical overreach in the application of the Royal Decree-Law, pointing out its infringement on fundamental citizen rights, notably the constitutional duty to contribute to public finances.

Among the scrutinized adjustments were more stringent limits on the offset of tax losses, constraints on the applicability of double taxation relief, and the compulsory inclusion of previously deducted impairment losses into the tax base. These changes, according to the Court, significantly altered the structural components of the Corporate Income Tax, impacting the core principle of tax liability and thereby rendering them unconstitutional and void.

The ruling emphasized that while these measures are invalidated, their effects are curtailed to situations not yet definitively resolved by judicial decision or final administrative action, underscoring a retrospective limitation in their applicability.

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