B Law & Tax
14 July 2023

Tax advisor: The Supreme Court defines rules for valuing radio services billed by companies related to a communicator

In its ruling of June 21, 2023, the Supreme Court upholds the adjustment for related transactions made by the Tax Inspectorate with respect to the appellant company, in which the media professional owns 94% of the shares. The Tax Inspectorate does not consider that there is simulation, but recognizes that it is valid for a media professional to operate through a company in order to obtain his income. The regularization is based mainly on the contract signed between the plaintiff and the company, in which the latter contracts exclusively the professional services of the communicator for the production of a radio program and journalistic collaborations carried out by him.

In this ruling, the Court establishes that when a natural person provides a service to a related company and that same company offers the same service to independent third parties, the agreed consideration must be considered as the market price of the good or service in question. Moreover, no additional adjustments need to be made to the agreed price in relation to the existence of the company, although the corresponding corrections must be applied for deductible expenses centralized in the company, according to the comparable free price method.

The Supreme Court considers that article 45.2 of the Personal Income Tax Law contains a presumption that can be rebutted. It annuls the judgment and the dissenting opinion, since it considers that the arguments presented are voluntarist and are based on assertions that it does not share, such as the lack of adjustment for related-party transactions and the alleged linkage of the companies.

The price that the related company pays to the regularized company for the services rendered by the partner, who is the only professional in charge of providing them in a personal and irreplaceable manner, is equivalent to the price that the professional company pays to the partner. The service rendered is not merely similar, but exactly the same.

Here the idea is raised that the regularization of related-party transactions does not really conform to the adaptation of market prices between independent parties, but in practice involves transferring income from the partnership to the partner, with the corresponding corrections. This is akin to considering the transactions as simulated. We cannot reach a definitive conclusion due to the lack of a precise and detailed definition of the facts, although we have had similar cases in appeals against recent penalties. In those cases, the Supreme Court upheld the penalties imposed on the partner for personal income tax, without considering the part for which the related company paid corporate income tax, since they are different subjects.

Considering that the legal system of transfer pricing adjustment applicable to the case in question, corresponding to the years 2006 and 2007, presented imprecise legal concepts, such as market value, which was not always easy to obtain or refute, it would have been necessary to present solid and detailed technical evidence to refute the conclusions of the Tax Inspection in this case.

The Administration does not provide sufficient evidence to demonstrate that its action is erroneous when comparing the current situation with the previous situation. The Court establishes that in similar cases, the service provided by a natural person to a related company and the service provided by that company to independent third parties are substantially the same when they are based on personal trust and the company lacks the means to perform the transaction without the participation of the natural person.

Given that the services are similar, it is considered appropriate to apply the methodology for related party transactions in 2006 to determine that the consideration agreed in this second transaction is the market price of the good or service in question. Furthermore, in the same circumstances, it is considered appropriate to apply the 2007 related-party transaction methodology to determine that the consideration agreed in this second transaction, which links the related company (in this case, the appellant in cassation) with an independent third party, is a comparable non-related transaction. It is not necessary to make adjustments to the agreed price as a comparative fee based solely on the recognition of the existence of the partnership, although the corresponding corrections must be made according to the comparable free price method for the tax-deductible expenses that are centralized in the partnership.

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