In recent years, the Spanish Tax Authorities (STA) have focused their resources on analyzing changes in individual’’s net worth and transfers of income using “aggressive techniques” based on the use of intermediary companies to channel personal gains

With the aim of simplifying voluntary compliance with tax obligations and reducing litigation, the STA have just released a note summarizing their criteria on intermediary companies.

In particular, two typical situations are addressed:

1. The use of intermediary companies by individuals who carry on professional businesses

Although professionals can choose the legal form under which they wish to provide their services, this cannot de done to allow the illegal reduction of the tax burden by the placing of an intermediary company between clients and the individual that actually renders the services (for instance, leading to avoidance of withholdings or application of the lower Corporate Income Tax rate compared to the higher Personal Income Tax rates).

In those cases, the STA will focus their analysis on two aspects: (a) whether the material and human resources to provide the services are owned by the individual or by the intermediary entity; and, (b) in cases where both the individual and the intermediary entity own the material and human resources, whether the intervention of the entity in the transactions is real.

If the intermediary entity does not have an adequate structure of material and human resources to carry out the professional activity or, even having it, the entity does not intervene in the operations, it could be deemed as a simulation (i.e., the entity would be disregarded). However, if the intermediary entity has an adequate structure of material and human resources to provide the services and intervenes in the operations, the STA will challenge whether the transactions between the professional and the entity are valued at arm’s length. If the valuation is not arm´s length, penalties may be imposed.

2. The use of entities as a mere instrument to hold assets related to the shareholder’s estate

If shareholders’ needs are covered by the intermediary entity in any way such as the personal use of assets of the company (e.g., dwellings, art, cars, yachts or aircrafts) without the corresponding lease agreement or the payment of the expenses associated with those assets, then the STA will determine if the individual shareholders are allocating that deemed income in their Personal Income Tax and if the company is actually deducting expenses and input Value Added Tax with regard to those assets.

Even if there is a lease agreement between the shareholder and the entity, it will be necessary to analyze if that leads to fair market rents and if the agreement has commercial sense for the company or if it is just a simulation to allow the deduction of personal expenses in the entity.

Both of the above scenarios could lead to a tax assessment on both the Personal Income Tax and the Wealth Tax of the shareholder, and the Corporate Income Tax and VAT of the entity.