Tax Exemptions: Definition, Types, and Legal Application

Tax Exemption Definition and Legal Basis

According to Article 22 of the General Tax Law (LGT), a tax exemption occurs when, despite the taxable event having taken place, a specific rule determines that there shall be no obligation to pay the tribute in that particular case.

Exemption vs. Non-Liability: Key Differences

The key difference between an exemption and an assumption of non-liability is that in an exemption, the taxable event does occur. However, a specific rule, especially applicable to the case, states that it will not produce the usual effect, namely the accrual of principal tax liability.

The exemption rule thus has a constitutive effect, not merely an explanatory one. If the exemption rule were to disappear, the act referred to would be taxed under normal conditions.

Classification of Tax Exemptions

Exemptions can be classified based on two primary criteria:

1. By Subject or Activity

• Subjective Exemptions: Set for specific subjects (e.g., foundations, the Red Cross, or certain public bodies).
• Objective Exemptions: Not linked to a specific subject, but determined by the mere mention of an activity.

2. By Scope of Neutralization

• Total Exemptions: Lead to the total neutralization of the obligation to pay.
• Partial Exemptions: Determine a liability for payment of a lesser amount (partial neutralization).

Justification and Purpose of Tax Exemptions

Exemptions, in principle, represent a loss of the core principles of economic strength, equality, and generality. However, they are typically established for two main reasons:

Policy and Constitutional Goals

Exemptions are set to focus on the protection of other constitutional principles that the legislature considers worthy of protection, and to encourage certain behaviors considered desirable. Examples include encouraging the investment activity of subjects or the supervision of certain entities or situations.

Technical Necessity

In other cases, exemptions are purely technical. This occurs frequently with Value Added Tax (VAT), where they are used to avoid situations that, when considering the whole tax system, would be illogical and lead to inconsistent results.

Establishing and Applying Exemptions (Rogada)

The establishment of the exemption occurs upon the completion of the requirements provided by the exemption standard.

The exemption is sometimes rogada (petitioned). This means that to be applicable, it must be requested by the taxpayer to a public body. In these cases, although the public body must process the application, the exemption is born by the will of the law and takes effect the moment the legal requirements are met. The public body's sole power is to ensure that the requirements have been compiled and fulfilled.