B Law & Tax
12 July 2023

Tax Advisor: The Supreme Court establishes that the basis of the penalty will be the difference between the amount not paid by the individual and the amount paid by the simulated special purpose vehicle.

The Supreme Court, in a ruling dated June 8, 2023, interprets that in case of simulation, the basis of the penalty will be the difference between the amount not paid by the individual and the amount paid by the simulated special purpose vehicle, in relation to the same income.

Thus, the Supreme Court confirms the penalty imposed on a well-known sports journalist, upholding the previous decision of the Audiencia Nacional. It rejects the plaintiff’s argument that the basis for the penalty should be the amount not collected by the Tax Authorities. Although the regulations do not contemplate a reduction in the basis of the penalty, in this case of simulation, the Court seems to allow deducting the Corporate Income Tax paid by the shell company from the basis of the partner’s penalty, due to the fact that there are no distinct personalities. Therefore, the basis of the penalty will be the difference between the amount not paid by the individual and the amount paid by the simulated shell company, in relation to the same income.

Despite the fact that the Chamber refers to the legal doctrine established in the Supreme Court decision of June 6, 2023, appeal no. 8550/2021, where it is considered that the qualification as related transactions must be applied in a consistent and homogeneous manner to all the implications and consequences of the regularization made, it cannot be suggested that the legal entity and the individual were the same entity to compensate the economic damage, while admitting the existence of related transactions. This implies the existence of two different subjects and, in theory, the application of a less severe sanctioning regime than the one that would correspond in cases of simulation or fraud.

However, in the current case, the State Tax Administration Agency (AEAT) has applied a different treatment to the one analyzed in that ruling. In one case, the simulation mechanism has been used, which has led to qualify the infringement as very serious, reflected in the sanction imposed, while in another case it has been considered a minor infringement, resulting in a sanction of considerably different severity. In the case under analysis, the Court, as explicitly mentioned in the decision that is the subject of the administrative appeal, justifies the existence of simulation and establishes that the professional services invoiced by the intervening company were provided directly by the professional partner of said company. Therefore, the income derived from the services effectively rendered must be included in the taxable income of the taxpayer.

What is relevant here is that this is a case of simulation in which the tax authorities have revealed the presence of a merely formal company with no real legal existence, where the partner and the company are the same person for tax purposes. As a result, there are tax consequences, including the corresponding penalties. Therefore, it is necessary to maintain consistency both in the regularization, considering the confusion of taxpayers in a single person, and in the imposition of the penalty established in article 191 of the LGT, in accordance with the principles governing the exercise of ius puniendi by the Administration and in line with the requirements of the principle of typicality.

The case is in line with article 191.1 LGT, where the appellant has not paid part of the personal income tax debt. The basis of the penalty is the amount not paid in the self-assessment. Given that payments have been made in both taxes (Personal Income Tax and Corporate Income Tax), the amount paid in Personal Income Tax must be subtracted from the Personal Income Tax regularization to determine the economic damage suffered by the Treasury.

The conduct is classified as very serious due to the simulation present in the case. The regularization was carried out considering the real non-existence of the interposed entity. The economic damage to the Treasury was limited to the difference between the amount not paid by the individual and the amount paid by the simulated shell company.

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