Agreements between companies to share income or losses: What must never be done

06.2015

Year-end agreements between companies regarding income allocation or past commitments can carry major VAT implications if not carefully structured. The Supreme Court judgment of 29 January 2013 illustrates this point. A Spanish company issued invoices for marketing and market research services to other EU companies, ostensibly exempt under the VAT rules. The tax authorities concluded that these services did not exist, as the contracts were vague, prices fixed, and invoices lacked detailed description of the services.

In reality, the invoices represented internal subsidies between companies, concealing inflated charges subject to VAT. Moreover, the authorities disallowed a substantial portion of the company’s input VAT. Tax law, being public rather than private law, applies the “substance over form” principle: invoices must reflect reality, not the reverse.

++ Published at the tax newsletter of the German Chamber of Commerce in Spain related to VAT news ++