Issuing invoices for professional services using an intermediary entity may raise doubts on the part of the tax authorities. The tax authorities tend to consider the creation of Single-Member Limited Liability Company (SLU) as suspicious when there is no real business structure behind it, which could lead to accusations of tax evasion. To avoid possible penalties from the tax authorities, it is essential to ensure that you have a legitimate business structure, corporate shares and the ability to carry out the economic activity with the participation of more than one professional.
An interposed entity, in tax and legal terms, represents a business entity that is established pretending to carry out legitimate economic activities, but in reality operates as an intermediary or front. This screen hides a natural person who acts as the sole administrator. In other words, it is a company employed to reduce the tax burden, given that companies are subject to Corporate Income Tax at a flat rate of 25%, while self-employed individuals are taxed according to their scale in Personal Income Tax (IRPF).
These interposed entities often involve a person who uses them to bill for professional services. This tactic can be used for a variety of purposes, such as tax evasion, hiding assets, avoiding legal liabilities or carrying out non-transparent financial transactions. Not all shell entities are illegal, but their legality depends largely on their purpose and whether they comply with tax and commercial regulations.
When the company has the necessary resources and the partner owns at least 25% of the share capital, the tax authorities will review whether the partner’s compensation complies with market rates, requiring that it represents at least 75% of the pre-tax profits.
Preventing tax penalties from the IRS when establishing an interposed entity is crucial to maintaining a smooth and legal tax situation. Here are some tips on how to achieve this:
– Legality and transparency: Make sure your pass-through entity is fully compliant with your country’s tax and business regulations.
– Genuine purpose: The interposed entity must have a legitimate and substantial business purpose, such as running a real business activity.
– Sound business structure: The interposed entity must have an actual business structure, including facilities, employees, equipment and resources necessary to conduct business operations.
– Adequate compensation: If you are the principal partner, make sure that the compensation you receive for your services is in line with market rates, avoiding under- or over-valuation for tax purposes.
– Accurate record keeping: Keep complete and accurate financial records of all transactions related to the interposed entity, including income, expenses, invoices and relevant documentation.
– Tax compliance: Make sure you comply with all tax obligations, such as filing tax returns and paying corporate and personal taxes on time.
– Tax advice: Consider consulting with a tax advisor or accountant who has expertise in local tax law to make informed decisions and comply with tax regulations.
– Avoid suspicious links: If you have financial or family connections to the interposed entity, make sure they are legitimate and do not raise suspicions of tax evasion.
– Internal audits: Conduct regular internal audits to ensure that all transactions and operations are following market regulations and standards.
– Continuing education: Keep abreast of tax laws and regulatory changes that may affect the interposed entity. Continuing education will help you make more informed decisions and avoid surprise penalties.
When the Tax Authorities detect that an interposed entity is illegal or is used to evade taxes, the consequences are significant.
If an interposed entity lacks the necessary infrastructure to carry out its professional activity, the Treasury considers it a simulation, regulated by article 16 of the General Tax Law. In this case, the Tax Authorities regularize the situation of the taxpayer, who must pay tax on the totality of the profits in his Personal Income Tax (IRPF) return. The interposed entity is completely ignored, as it is considered a mere artifice to evade taxes.
These measures are taken seriously by the Tax Authorities to prevent the abuse of interposed entities and to ensure tax compliance. Therefore, it is critical that those using these structures ensure that they are legitimate and comply with tax regulations to avoid negative consequences.
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