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Criteria of the administration on the benefit distribution of companies providing professional services

Today we are going to talk about the criterion that follows the Tax Administration, in order to evaluate as appropriate the retribution of the partners in a society.

It is a quite habitual practice among self-employed entrepreneurs, who when their professional activity reaches a certain volume, they choose to constitute a mercantile society, since this way they obtain numerous benefits, not only fiscal, but of protection of the personal patrimony and limited liability, as well as better access to financing and greater operative facilities when hiring with clients, as well as obviously to benefit from a lower tax rate in CORPORATE TAX than in IRPF.

It seems that this exercise of option economy is not to the liking of the Tax Agency, since its focus on these types of societies its criterion has varied, being the last novelty and the reason of this article, which The Central Administrative Economic Tribunal (Resolution dated March 2, 2016) has chosen to ignore the Corporate Tax Law and to apply its own criteria, following the line that has been accustomed to us lately to not facilitate the work Of entrepreneurs and increase legal uncertainty and the fear of taxpayers and their legal advisers to exercise their rights recognized by law, since the partial interpretation of the Administration prevails, almost always for tax purposes, above the legislative power. This increases both administrative and judicial litigation, with the risk that, at the moment of obtaining a favourable judicial resolution, the damage will be irreparable.

Historical criteria of the administration

1. The assessment of the related operation and the inspector criteria regarding the simulation

At an early stage, the rules on related transactions did not establish any criterion other than the market price to value such transactions.

In the scope of the Inspection, however, the Tax Administration has come to consider and apply that the fact of incorporating a sole partnership that provides professional services through its sole shareholder is a tax simulation assumption, ie the actual relationship is Established between the individual partner and the final customer, being the only purpose of the society, to obtain a tax saving. Reason why, in the inspections, that there was and still is, it was opted to transfer the whole profit obtained by the company to the partner in his personal income tax. This is also in the case of companies with personal and material means, especially of various staff that developed the activity together with the professional partner.

2. Imputation of 85% of the social benefit to the partner.

With the reform of the Corporation Tax and especially the control and reform that was carried out on the related operations, Royal Decree 1777/2004 of 30 July, which approves the Corporate  Tax Regulations (now repealed), established that the remuneration of a company to its professional partner would be considered as market value, provided that:

  1. The company is a small entity
  2. That more than 75% of the income of the company came from professional services
  3. That it will have enough material and human resources for the development of the activity
  4. That the amount of the remuneration to the professional partners was at least 85% of the previous result.

Thus, the regulatory text expressly stated the following:

16.6. A efectos de lo dispuesto en el artículo 16.4 de la Ley del Impuesto, el obligado tributario podrá considerar que el valor convenido coincide con el valor normal de mercado cuando se trate de una prestación de servicios por un socio profesional, persona física, a una entidad vinculada y se cumplan los siguientes requisitos:

a)Que la entidad sea una de las previstas en el artículo 108 de la Ley del Impuesto, más del 75 por ciento de sus ingresos del ejercicio procedan del desarrollo de actividades profesionales, cuente con los medios materiales y humanos adecuados y el resultado del ejercicio previo a la deducción de las retribuciones correspondientes a la totalidad de los socios-profesionales por la prestación de sus servicios sea positivo.

b)Que la cuantía de las retribuciones correspondientes a la totalidad de los socios-profesionales por la prestación de sus servicios a la entidad no sea inferior al 85 por ciento del resultado previo a que se refiere la letra a). c)Que la cuantía de las retribuciones correspondientes a cada uno de los socios-profesionales cumplan los siguientes requisitos:

1.º Se determine en función de la contribución efectuada por estos a la buena marcha de la sociedad, siendo necesario que consten por escrito los criterios cualitativos y/o cuantitativos aplicables.

2.º No sea inferior a dos veces el salario medio de los asalariados de la sociedad que cumplan funciones análogas a las de los socios profesionales de la entidad. En ausencia de estos últimos, la cuantía de las citadas retribuciones no podrá ser inferior a dos veces el salario medio anual del conjunto de contribuyentes previsto en el artículo 11 del Reglamento del Impuesto sobre la Renta de las Personas Físicas, aprobado por el Real Decreto 439/2007, de 30 de marzo.

El incumplimiento del requisito establecido en este número 2.º en relación con alguno de los socios-profesionales, no impedirá la aplicación de lo previsto en este apartado a los restantes socios-profesionales.

This criterion was applied with little controversy, except for few exceptions in which the administration understood that the society did not have material or human means.

3. Imputation of 75% of the social benefit to the partner.

With the new Corporate Tax Law, Law 27/2014, of November 27, on Corporate Income Tax, which came into force in January 2015, the imputation criterion of 85% was reduced to 75% and Requirement of a small company. This was one of the main novelties in the new law, since it seemed that the legislator finally took into account the needs of the taxpayers and once wrote an article more in line with the social reality and fixed within the legal text itself the criterion to Applied by the taxpayer if he did not want to have any conflict with the administration in this regard.

18.6. A los efectos de lo previsto en el apartado 4 anterior, el contribuyente podrá considerar que el valor convenido coincide con el valor de mercado en el caso de una prestación de servicios por un socio profesional, persona física, a una entidad vinculada y se cumplan los siguientes requisitos:

a) Que más del 75 por ciento de los ingresos de la entidad procedan del ejercicio de actividades profesionales y cuente con los medios materiales y humanos adecuados para el desarrollo de la actividad.

b) Que la cuantía de las retribuciones correspondientes a la totalidad de los socios-profesionales por la prestación de servicios a la entidad no sea inferior al 75 por ciento del resultado previo a la deducción de las retribuciones correspondientes a la totalidad de los socios-profesionales por la prestación de sus servicio

c) Que la cuantía de las retribuciones correspondientes a cada uno de los socios-profesionales cumplan los siguientes requisitos:

1.º Se determine en función de la contribución efectuada por estos a la buena marcha de la entidad, siendo necesario que consten por escrito los criterios cualitativos y/o cuantitativos aplicables.

2.º No sea inferior a 1,5 veces el salario medio de los asalariados de la entidad que cumplan funciones análogas a las de los socios profesionales de la entidad.

En ausencia de estos últimos, la cuantía de las citadas retribuciones no podrá ser inferior a 5 veces el Indicador Público de Renta de Efectos Múltiples. El incumplimiento del requisito establecido en este número 2.º en relación con alguno de los socios-profesionales, no impedirá la aplicación de lo previsto en este apartado a los restantes socios-profesionales.

But, as it could not be otherwise, the Administration has chosen to ignore this regulation and choose to apply its criteria without any basis what brings us to the next point

4. About how the administration ignores the law and impose 100% of the profit to the shareholders, collecting important amounts for sanctions and interests.

Following a resolution of Unification of Doctrine of the Central Administrative Economic Court of March 2016 (download here!). The administration establishes a binding criterion for all officials.

In that resolution, the Spanish Tax Administration, determines that:

“When the service rendered by the natural person to the related company and the one rendered by the related company to independent third parties is substantially the same and from the analysis of the assumption of fact it is derived that the company lacks the means to carry out the operation if it is not for The necessary and indispensable participation of the natural person, not adding value (or being this residual) to the work of the individual, it is in accordance with the methodology of related operations to consider that the consideration agreed by this second operation is a “non Comparable, “and it is not necessary to incorporate a valuation correction by merely recognizing the existence of the company, and this without prejudice to the corrections that, under the comparable free price method, should be carried out by the deductible fiscal expenses that are centralized in the society.”

From the analysis of the resolution it is derived that the administration follows its own criterion, inventing requirements that do not exist in the law, such as the contribution of added value, making it impossible for the taxpayer to make a correct and safe tax planning, since not even following The literality of the Law is safe from the own criteria established by the Administration, which have little or nothing to do with the current legislation. In conclusion, the Administration understands that a company that provides professional services (which obviously will be provided by its partner if it is a small company) should add value to the service, but does not explain what kind of added value this is, and we do not believe, We can think of another value that a professional society can bring beyond its own human resources.

In short, as always, the Administration always tends to its own interests, unrelated in most cases to law and reality, making the work of advisers and the tranquillity of taxpayers practically impossible, since as has been said , Not even following an article as clear as 18.6 of the Corporation Tax Law can be quiet, if not to the contrary, taking into account the criteria set by the TEAC in many cases would be inapplicable the content of the Law itself, The taxpayer will be charged 100% of the profit obtained in the company.

Obviously, for our part we understand that the previous criterion is rebuttable considering the literality of Article 18.6 of the Law and if the content of the Act has been scrupulously followed, it is necessary to discuss until the end the obligation of the Administration to apply the provision legally collected In the applicable standard itself. It is also worth noting that following the discussion of this new administrative criterion will require first to go to the economic-administrative courts and afterwards to the courts of the contentious order (with the cost involved), which take An average of 4 years to settle, so that from the start of the inspector procedure, until a judicial decision is obtained from the Administrative Contentious Court can spend, 8 or 10 years, (provided that the term of resolution of the administrative economic courts Is 4 year.

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