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Modification of Obligations to Document Related-Party Transactions in Spain

27 May 2010

The Spanish legislature has responded, through the Royal Decree-Law on Measures to Boost the Economic Recovery and Employment, to the European Court of Justice's judgment of 21 January 2010 by simplifying documentation obligations for SMEs and limiting the penalties that can be imposed on them. Taxand in Spain reviews the documentation obligations and identifies the impact for businesses.

In the area of documentation, companies that are considered to be of a reduced size (EUR8 million in net revenues) will not have to document their related-party transactions where the total amount of such transactions in the year does not exceed EUR100,000, valued at arm's length. Transactions with tax havens must be documented regardless of their amount, unless they involve entities resident in an EU Member State and it is evidenced that the transactions result from valid economic reasons and that the counterparty located in the tax haven engages in economic activities.

In addition, one of the most controversial aspects--the modulation of the penalty--has been rectified for SMEs that are required to document their related-party transactions. In this case, maximum limits are established for the penalties that can be imposed on them where it is not appropriate for value adjustments to be made by the tax authorities. Consequently, the penalty may not exceed the lower of these two amounts: 10% of the value of the overall amount of the related-party transactions; 1% of the net revenues of the entity.

As established in Additional Provision One ("Adaptation of obligations to document related-party transactions to EU case law and to comparative law"), within three months following the entry into force of the Royal Decree-Law, the Government will process the modification of the tax legislation regulating the obligation to document related-party transactions. This will reduce the administrative burdens that companies have to bear, on the basis of the following factors: where they involve domestic (not international) transactions, where they involve small and medium-sized enterprises, where their amount is not significant and where tax havens are not involved.

The Spanish legislature has traditionally established that transactions performed between Spanish entities should be subject to the same valuation and documentation requirements as those performed with related foreign companies on the grounds of not infringing any EU Law principles, since the applicable regime does not make any distinction between transactions between Spanish and non-Spanish entities. Notwithstanding the above, in the case of Belgian transfer pricing legislation, which requires documenting international transactions exclusively, the ECJ itself has considered in its judgment that discriminatory treatment can be justified by reasons in the public interest that are aimed at preserving the balanced allocation of taxing power between the Member States and at preventing tax avoidance.

Taxand's Take

The changes introduced apply to a reduced number of taxpayers, although the contents of the provision generate expectations of change for a broader section of companies that hope to see the administrative burden that they bear under the current legislation reduced. It will be necessary to wait and see which modifications are finally introduced.

Your Taxand contacts for further queries are:
Ram?n L?pez de Haro
T. +34 91 514 52 00

Javier Montes Urd?n
T. +34 (91) 514 52 00

Taxand's Take Author