Spain vs LA REHOS, S.L., July 2022, Supreme Court, Case No 7268/2021, ATS 10616/2022 – ECLI:EN:TS:2022:10616A

« | »

The issue presented before the Spanish Supreme Court is if and how the arm’s length principle apply to the salary of the owner of a consultancy company for personal services provided to an independent company, i.e. if the price agreed for provision of these services to an independent party is a CUP in relation to the salary of the owner.

In order to determine the market value of the services provided by Mr. Primitivo to the company LA REHOS, S.L., is based on the value of the relationship between LA REHOS, S.L. and the third parties from which it obtains the income for the services rendered by Mr. Primitivo with the necessary corrections to obtain the equivalence: those derived from the expenses and costs related to the activity of Mr. Primitivo incurred by or residing in the entity LA REHOS, S. L. and those that originated in the expenses or costs related to the services provided by Mr. Primitivo to UNIPREX SAU and to the different written media initially accounted for in the rest of the related entities and subsequently transferred to LA REHOS, S.L., by means of internal invoicing.

In a judgement handed down on 7 July 2021 the National High Court set aside the assessment of the tax authorities, and an appeal was then filed with the Supreme Court.

Judgement of the Supreme Court

The admission of the appeal was allowed by the Court.

However, the Supreme Court has not ruled on how to regularise professionals who obtain their income through professional partnerships in the case of the provision of intuito personae services, and the tax administration has considered that they should be regularised as related-party transactions by means of valuation at market prices, considering that, in order to determine the normal market value, the price at which the third-party company contracted the professional partnership through which the partner provided his services should be taken into account.

A judgement will be handed down on the following issues

  • Determining whether section 2 of Article 45(2) of Royal Legislative Decree 3/2004, of 5 March, approving the revised text of the Personal Income Tax Act, establishes a presumption iuris tantum or iuris et de iure, by stipulating that the consideration effectively paid shall be deemed to coincide with the normal market value in transactions corresponding to the exercise of professional activities or the provision of personal work by individuals to companies in which more than 50% of their income comes from the exercise of professional activities, provided that the entity has the personal and material resources to carry out its activities.
  • Specify, in cases where the service provided by a natural person to the related company and the service provided by the related company to independent third parties is substantially the same, being the provision of an intuito personae service, and with the company lacking the means to carry out the transaction except through the necessary and indispensable participation of the natural person – not providing added value (or this being residual) to the work of the natural person – if it is in accordance with the methodology for related-party transactions in 2006, to consider that the consideration agreed for this second transaction is the market price of the good or service in question.
  • Likewise, in the same circumstances described above, specify whether it is in accordance with the methodology for related-party transactions for 2007, to consider that the consideration agreed for this second transaction is a “comparable non-related transaction”, it not being necessary to incorporate a valuation adjustment for the mere recognition of the existence of the company, and this without prejudice to the corrections that, in application of the comparable free price method, should be made for the fiscalcularly deductible expenses that are centralised in the company.

Click here for English translation

Click here for other translation


Related Guidelines

Leave a Reply

Your email address will not be published. Required fields are marked *