For some time now, related-party transactions have been a target of control by the Tax Agency. The reason is that these types of transactions may be related to tax fraud practices. In transactions between related parties, they may agree on a more tax advantageous price for the transaction than would be freely agreed on the market. In order to reduce the tax burden, or even to transfer the tax burden to other countries with lower taxation.
What are related-party transactions?
The related-party transactions are all those operations of mercantile type carried out between natural or legal persons that keep a certain degree of high linkage between them. This may be because they belong to the same business group. Because they have shareholders or administrators in common. And finally because there is a family relationship between the parties to the transaction.
Specifically, Law 27/2014 of November 27 of the 27th of the Corporate Income Tax. In its article 18 literally considers related persons or entities or operations between related parties to:
- Any entity and its partners or participants.
- An entity and its directors or administrators. Except for the remuneration for the exercise of these functions.
- An entity and its spouses or persons related by kinship. In direct or collateral line, by consanguinity or affinity up to the third degree of the partners or participants, directors or administrators.
- Two entities belonging to a group.
- An entity and the directors or administrators of another entity. When both entities belong to a group.
- Two entities when one is indirectly owned by the other for more than 25% of the capital stock or shareholders’ equity.
- Two entities in which the same partners or participants participate, directly or indirectly, in at least 25% of the capital stock or equity. This also applies in the case of spouses. But also in the case of persons linked by kinship, in direct or collateral line, by consanguinity or affinity up to the third degree.
- An entity resident in Spanish territory and its permanent establishments abroad.
To be highlighted
In cases where partners or participants are related to the entity, the shareholding must be equal to or greater than 25%. The reference to the administrators will include both de jure and de facto administrators.
For example, the use or lease of real estate owned by a company by a partner would be a related-party transaction. A sale of material or provision of services between the parent company and a subsidiary company. Or also, the invoicing of a professional partner to his own company. This type of operations are controlled with special interest by the Tax Agency.
How are related-party transactions valued?
The law establishes that: “Transactions carried out between related persons or entities shall be valued at their market value. Market value shall be understood as that which would have been agreed upon by independent persons or entities under conditions that respect the principle of free competition”.
Thus, for a related transaction to be duly valued, it must be valued following one of the different methods established by the Law to value the market value. Such as, comparable free price, resale price, cost with increments, etc.
A technical architect carries out the project of his sister’s house. He should invoice fees similar to those charged to third parties, comparable free price method.
A businessman who buys materials abroad resells them to his wife’s SL. To the cost of the transaction he should apply the usual commercial margin in transactions with third parties, Resale Price Method.
Transactions between a professional partner and his own company are subject to special regulation and control. The law requires that the partner’s remuneration for his professional services cannot be less than 75% of his company’s profit. Excluding his own remuneration. The Tax Agency can even demand 100% in the case that the company does not have any structure.
For the control of these different operations the Tax Agency uses the data and information that the Tax Agency already has about the taxpayer. In addition, it can demand the contribution of documentation or information of the operations.
A specific obligation of this type of operations is the one related to the presentation of the Form 232.
This is the form in which the companies must declare the related-party transactions. It must be filed in the eleventh month following the end of the previous fiscal year. That is to say, if the closing of the fiscal year is established on December 31, the companies must file Form 232, electronically, from November 1 to 30.
This form must be filed when:
- The set of related transactions in the same period, of the same type, with the same person and with the same valuation method, exceeds 50% of the entity’s turnover.
- When specific transactions of the same type exceed €100,000. Transactions between a company and a person under the module regime when there is a direct or family relationship equal to or greater than 25%. The transfer of businesses and the transfer of securities, the purchase and sale of real estate or intangible asset transactions.
- When the transactions carried out in the same tax period with the same person or entity exceed €250,000.
- When the operations are carried out with companies located in tax havens.
Due to the importance of these operations and the serious consequences that an incorrect valuation and treatment of these operations can have, we recommend to turn to experts in the field to help you in this matter. We will be pleased to help you.