Last week, the Spainish Tax Agency published an informative note, which aims to alert taxpayers and their advisors about the risks of individuals filing as companies.

This publication follows the position the Tax Administration outlined in the last Annual Tax Control Plan, and addresses a topic that is frequently in the news when affecting public figures.

In the aforementioned note, the Tax Agency warns that the use of these structures by the taxpayer, despite being permitted by law, may lead to regularizations and sanctions if a series of general criteria, applied by the Administration in these cases, are not met.

The note focuses on two classes of risks. On the one hand, those associated with individuals using coprporate structures to conduct and develop their professional activities And on the other hand, those related to the retention of income in corporate structures.

Interposition of companies in the development of professional activities

The Law provides that the provision of professional services can be done through the constitution of a professional entity through which an individual provides services.

Notwithstanding the foregoing, the Administration warns that it is necessary to analyse each case to determine whether the human and material resources through which the services are provided are the property of the individual or of the legal person, and if both have human and material resources, to analyse whether the intervention of the company in carrying out the operations is real.

In the absence of material assets, the Administration’s response has been to regularise by simulation (Art 16 LGT); however, if material and human assets exist, it is necessary to analyse whether the services are valued at their market value, which in the case of incorrect valuation will result in appropriate regularisation and sanction.

Holding of income in corporate structures

Sometimes the taxpayer places a portion of his personal assets in companies he or she owns, which can lead to confusion between the assets of the individual and the company. In this regard, it should be remembered that the ownership and use of the assets must be supported by the corresponding legal title and, if applicable, taxed according to their true nature.

In this sense, the Agency outlines some conduct contrary to regulations that ought to be controlled by agents of the company.  These include: the taxpayer’s use of the dwelling or means of transport without the corresponding yield being imputed to the individual’s income, the undue imputation by the company of expenses related to these goods, or the deduction of VAT paid on the acquisition of goods not intended for a business or professional activity.

Such conduct may result in tax contingencies subject to regularisation by the Administration in Personal Income Tax, Corporation Tax, or Value Added Tax and Wealth Tax.