Basis for Tax Penalties in Service Companies

The Spanish Supreme Court has recently issued two judicial decisions (No. 8550/2021 and No. 5002/2021) of relevance for entities providing professional services, in particular concerning penalties arising from an administrative regularization involving a new valuation of transactions carried out between a partner providing professional services and the entity.

The aspect under discussion was what was the basis for the applicable penalty in each case: as we will see, this will depend on whether the transaction qualifies as a related-party transaction or as a simulation.

In this sense, it is understood that simulation occurs in a case in which the rendering of professional services is carried out through an intermediary company (“Sociedad interpuesta”), resulting in the underlying reality (which was intended to be concealed to obtain a tax advantage) that the services invoiced by the intermediary company were rendered directly by the professional partner, and the income derived from such professional services must be included in the taxable income of the taxpayer in the personal income tax.

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On this basis, the Spanish Supreme Court establishes the following distinction in the calculation of the basis of the penalty derived from an administrative liquidation in a company rendering professional services:

  • In the case in which simulation is not considered and the qualification is a related transaction (the existence of two legally different persons -the related company and the partner- prevails): to regularize the differences in the valuation of these transactions, on the one hand, the IS (Corporate Income Tax) is regularized by returning to the company the appropriate amounts and, on the other hand, the partner is regularized in the IRPF (Personal Income tax) by attributing to him the income that the related company declared. The basis for calculating the penalty of the partner in the IRPF is the amount not paid in the IRPF without being able to deduct the part that the related company paid in the IS.
  • Conversely, in the case that is qualified as a simulation, the individual and the company are a single person for tax purposes, which occurs when the Treasury dictates that they are instrumental companies that lack material and professional means so that the taxpayer has settled both the Corporate Income Tax (IS) and the Personal Income Tax (IRPF) although in reality it should be taxed all as an individual (IRPF). In these cases, the basis of the partner’s IRPF penalty will be the difference between the amount not paid by the individual and the amount paid by the company. In other words, the IS paid by the entity will be considered as paid on behalf of the partner and will be deducted from the basis of the partner’s IRPF penalty.

In conclusion, the Spanish Supreme Court has established doctrine and after a period in which the taxpayer did not have legal certainty as to what would be the basis for the applicable penalty, has clarified the criteria to be applied, clearly differentiating those cases in which there is a regularisation for related transactions from those in which it can be established that there has been simulation.

If you have any questions on this subject or others of a fiscal, legal or accounting nature, please do not hesitate to contact our tax advisors in Barcelona.

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