Protected Cooperatives: Consequences of Failing to Keep Separate Accounts

Failure to keep cooperative and non-cooperative results in separate accounts is grounds for losing protected tax status. As a result, all of the cooperative’s results are taxed at the standard rate and the tax benefits already enjoyed are withdrawn.

The basic legislation governing cooperatives is set out in Law 27/1999 of 16 July on Cooperatives, together with the complementary regional rules. Their tax regime is defined in Law 20/1990 of 19 December on the Tax Regime for Cooperatives (the “Cooperatives Tax Law”) and, on matters it does not cover, in the general legislation governing Corporation Tax.

The Cooperatives Tax Law distinguishes between protected cooperatives and specially protected cooperatives. In the case discussed here, the claimant was taxed as a protected cooperative. Article 6 of that Law provides:

“1. For the purposes of this Law, protected cooperatives are entities which, regardless of when they were established, comply with the principles and provisions of the General Law on Cooperatives or the cooperative laws of the Autonomous Communities with jurisdiction in this area, and do not fall within any of the grounds set out in Article 13.

2. Notwithstanding the preceding paragraph, the provisions of Chapter Four of Title III of this Law apply to all cooperatives that have been duly established and entered in the relevant Register of Cooperatives, even if they fall within any of the grounds for losing protected cooperative status for tax purposes.

In that case, cooperatives are always taxed at the standard Corporation Tax rate on all their results.”

Article 16 of the Law specifies the items making up the taxable base:

“1. Cooperative and non-cooperative results shall be considered separately when determining the taxable base.

2. Cooperative results are the returns determined in accordance with the provisions of the following section of this Chapter.

3. Non-cooperative results are non-cooperative returns and the capital gains and losses referred to in Section 3 of this Chapter.

4. To determine cooperative or non-cooperative results, in addition to the specific expenses required to obtain the relevant income, the portion of the cooperative’s general expenses corresponding to that income under sound allocation criteria shall be allocated to it.

5. For tax assessment purposes, the taxable base corresponding to either type of results shall be reduced by 50% of the portion allocated, as required, to the Mandatory Reserve Fund.”

As regards the grounds for losing protected cooperative status for tax purposes, Article 13 states, insofar as relevant here:

“Protected cooperative status for tax purposes shall be lost if any of the following circumstances apply:

(...)

10. Carrying out cooperative transactions with non-member third parties outside the cases permitted by law, and failing to keep separate accounts for those transactions or to allocate the resulting profits to the Mandatory Reserve Fund.

No cooperative, whatever its type, may carry out transactions with non-member third parties exceeding 50% of its total transactions without losing protected cooperative status for tax purposes. (...)”

Finally, Article 37 of the Law sets out the consequences of losing protected cooperative status:

“If any circumstance defined in this Law as grounds for losing protected cooperative status occurs, the general tax regime shall apply, taking into account Article 6(2) of this Law, and the benefits enjoyed in the financial year in which it occurs shall be withdrawn. This is without prejudice to the provisions of the General Tax Law on tax infringements and penalties and late-payment interest and, in particular, Articles 84 and 87(3) thereof concerning penalties other than fines.”

Accordingly, the Cooperatives Tax Law clearly sets out the requirements cooperatives must meet to benefit from the special regime, the grounds for losing protected cooperative status for tax purposes, and the consequences of losing that status.

On the loss of protected cooperative status, the Supreme Court held in its judgment of 20 December 2013 (appeal no. 2943/2010) that the occurrence of any one of the grounds listed in Article 13 of the Cooperatives Tax Law is sufficient:

“In relation to that tax year, and focusing on the first ground of complaint, we should recall that the tax regime applicable to cooperatives in the case under review is that established by Law 20/1990 of 19 December. As its preamble acknowledges, that Law continues a tradition in our tax system under which cooperatives have always received special attention from the legislature, which, mindful of their distinctive nature as associations and their social role, has long granted them certain tax benefits. The regime covers both protected and specially protected cooperatives (Articles 6 and 7 of the Law), the latter including worker cooperatives.

However, the special protection afforded by the legislature, and the tax benefits under Article 34 of the Law, are conditional on compliance with the requirements laid down in the legislation. It must not be forgotten that this is a tax-privileged regime. (...)

The opposite conclusion would unfairly favour cooperatives which voluntarily set aside the social and educational characteristics that distinguish this type of commercial entity, as well as the workers’ self-management function, while participating in the market for goods and services with an initial advantage over other entities organised as commercial companies. That would amount to an unjustified tax benefit or protection. (...)

The fact is that failure to meet even one of the listed requirements results in the loss of the privileged regime for the relevant period. This does not mean that the regime is withdrawn permanently; rather, the tax treatment for the 2000 financial year is adjusted, subjecting the cooperative to the conditions imposed by law on its activity and removing the tax advantages previously granted, once the Tax Inspectorate has established the failure to comply and assessed the resulting debt within its powers of audit and investigation.”