B Law & Tax
31 August 2023

Tax Advisor: The Supreme Court reduces fines from the Tax Authorities for using intermediate companies and paying less taxes

Citizens penalized for using intermediary companies in order to reduce their income tax (IRPF) can now subtract the amounts paid for corporate income tax when calculating the basis of the fine, according to a Supreme Court ruling issued on June 8, 2023.

The reporting judge argues that in these cases the economic damage to public finances is limited by differentiating between what should have been paid for Personal Income Tax, minus what has already been paid for corporate income tax.

“The Administration, which has the sanctioning power, cannot at will subsume the infringing conduct in situations of related-party transactions or simulation, at least without adequately justifying the circumstances that differentiate one from the other to grant a different qualification”, states the magistrate.

In this way, the Supreme Court begins to distinguish between situations in which intermediary companies are used, known as simulations, and those that arise in the context of related-party transactions. In the latter case, when determining the fine to be imposed, the ruling of June 6, 2023 establishes that the payment of corporate income tax should not be considered when calculating the basis for the penalty.

In this last instance, the court’s decision is based on the existence of two distinct legal entities: the individual and the company. Therefore, it is established as a doctrine that in situations of related transactions, where discrepancies in valuation result in a Corporate Income Tax regularization for the company and an Income Tax (IRPF) regularization for the individual, the basis for calculating the tax penalty, as stipulated in Article 191 of the General Tax Law (LGT), should be the amount that the individual has not paid in its tax return due to the commission of the infraction.

In relation to the issue of proportionality, this ruling argues that the tax regulation itself establishes different levels for the possible infringements, while at the same time providing different guidelines for graduating the penalties. All these aspects are respected by the sanctioning decision.

The agreement to impose the fine establishes, in the same context, that “the company in which it has participation and control has been used to hide the identity of the taxpayer as the true recipient of the income generated by the activity of legal advice. This conduct has resulted in the lack of taxation of this income”.

Thus, the taxpayer has intentionally failed to report taxable income by not reporting the income corresponding to the services provided in his capacity as a professional, even though such services were billed through the partnership.

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