Billing of the partner of a Law Firm via the interposition of a company


Spanish Supreme Court ruling, dated September 16, 2015, in response to the appeal for unification of doctrine brought by the company involved.

During a tax audit to the “Law Firm X”, it was noted that it included in the accountancy (account 6230001 “professional services partners”) payments done as a consequence of invoices issued by various companies that were majority shareholders of the partners themselves “Law Firm X”; one of these companies was the “Company Y”, being effectively deductible said expense for the “Law Firm X” but not in the concept intended by the “Company Y” as a company but in the costs of professional activities of private individuals.

Of the findings made by the Audit it concluded that the partner in question, was a partner and sole director of the “Company Y”, which had a 14% stake in the share capital of the “Law Firm X”, the main client of the “Company Y” is the “Law Firm X”, that the provision of services provided by the partner to the “Law Firm X” takes place on the premises of the “Law Firm X”, which is the “Law Firm X” who meets the costs incurred by the partner in the development of his activity.

Therefore the tax auditor understood that the works invoiced by the “Company Y” and addressed to the “Law Firm X”, were not actually developed by that entity, but developed by the partner in his capacity as a private individual, using the “Company Y” as a mere collection instrument. Existing simulation in the business activity carried out by the “Company Y”, which did not carry out any business activity but it was used as a nominee company by the partner, so it would be considered that the income received by the “Company Y” are properly chargeable to the partner.

According to the above, the income obtained by the partner should be classified as income from professional activities as required under the Personal Income Tax Law, and not as dividends (which, at that time, applied the deduction for double taxation).

Consequently, regarding VAT, the VAT quotas were unduly charged by “Company Y” due to the fact that it cannot be considered as affected to “Company Y” but to the partner then, the payment before the Spanish Tax Authorities of such VAT quotas corresponds to the partner, being the Law Firm legitimized to deduct such VAT quotas.

The criterion of the tax audit was confirmed by the Spanish Economic Administrative Court, by the High Court of Madrid, and the Spanish Supreme Court through this judgment.

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STS 16 09 2015

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