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Operations between related parties in spain and bad faith

Big is not beatiful. Size is not synonymous with quality

A relationship between companies alone is not a ground to suggest that such companies are acting in bad faith. Fraud must always be reasoned on a case-by-case basis


A judgement from the High Court of Asturias (TSJ Asturias) dated 24.03.2010 overturned a decision by the tax authorities where, based on the mere existence of a relationship between two companies (one dealing with real estate development and the other devoted exclusively to the sale and purchase of properties), the authorities considered that both companies developed the same activity and obliged both companies to pay tax under the general Corporate Tax system and not under the special system for real estate holding companies (sociedades patrimoniales) in the case of the company dedicated to the purchase and sale of real estate.

The authorities deemed that the fact that both companies bought or sold properties to one another necessarily meant that the special taxation system for holding companies (sociedades patrimoniales) was not applicable. This special system had certain advantages (as of 2007 this system no longer exists) and this made the authorities regularly review whether the application of the law was justified or not. Essentially, the debate was centred on whether a holding company actually developed an economic activity. This discussion was vastly important in the scope of companies which own real estate property, as only active companies can benefit from the advantages of taxation regulations (such as, for instance, expense deduction and input VAT, etc.)

The Court ruled that, in the case that the authorities considered that there could have been fraud, it should have investigated the issue thoroughly, and should have tackled it via simulation or another alternative measure available to attack fraudulent structures, but in no event does the mere relationship between companies justify, in itself, the correction of this structure by the authorities, thus unilaterally modifying the corporate structure freely created by taxpayers.

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