B Law & Tax
15 September 2023

Tax advisor: The TEAC adjusts its criteria for calculating the sanction base in cases of corporate simulation

By means of the recent resolution no. 4117/2020, issued on July 24, 2023, the Central Economic-Administrative Court (TEAC) has modified its previous criteria in relation to how it determines the basis for penalties in cases of corporate simulation. This modification is based on the doctrine established in Supreme Court decision no. 770/2023, dated June 8.

Under this new perspective, when a partnership simulation has been declared and all the activity is considered to correspond to the partner, thus eliminating the intermediate entity for regularization purposes, the basis of the penalty will be calculated as the difference between the amount not paid by the individual and the amount paid by the partnership declared as simulated. This differs from the approach applied in cases of related-party transactions, where the basis of the penalty is calculated as the amount not paid by the individual.

In this regard, it is essential to recall the criteria established by the aforementioned Supreme Court ruling no. 770/2023, of June 8:

  1. The question of objective interest in the case has already been answered in a previous judgment and that legal doctrine must be followed.
  2. The sanctioning power of the State must respect the principles of legality and typicity. The Administration cannot classify an infringing conduct as related-party transactions or simulation without adequately justifying the differences that justify the classification.
  3. If it is legally possible to classify infringing conduct differently, the interpretation most beneficial to the infringer must be chosen. In this case, the conduct is considered minor, since the economic damage to the Treasury is limited to the difference between what should have been paid by the individual and what has already been paid by the simulated entity in relation to the same income.

In view of the aforementioned doctrine, the TEAC has changed its approach regarding how the basis of penalties is calculated in cases of corporate simulation. Now, when a company is declared to be simulated and all activities are considered to belong to the partner, the basis of the penalty is calculated as the difference between the amount not paid by the individual and the amount paid by the shell company. This differs from the cases of regularization for related-party transactions, where the basis of the penalty is calculated as the amount not paid by the individual.

In the resolution in question, the TEAC determined that the State Tax Administration Agency (AEAT) had calculated the penalty without considering the amounts already paid by the shell company, so the penalty is partially annulled and its recalculation is ordered following the new criteria, with the possible refund of excess amounts and the corresponding interest.

In addition, the TEAC refers to a recent Supreme Court ruling which establishes that, when calculating the economic loss for the Treasury in the graduation of penalties, the net amount, which includes payments on account, withholdings and installment payments, must be used. This criterion must be considered by the tax inspection when executing the resolution.

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