Transfer Pricing treatment in the transactions between the professional shareholders and their companies
This note was outlined as a consequence of the result of two sentences of 2017, which show the position of the Spanish Courts in cases related to the transactions between artists and its companies.
Firstly, is important to mention the law that regulates the related transactions regarding the shareholders (professionals) with their companies. This is the Corporate Income Tax Law (27/2014 November 27), which provides in its article 18.6. the requirements to consider that the price applied between a shareholder (professional) and its related company are at arm’s length. The requirements are the following:
(a) That more than 75 percent of the income of the company come from the professional activities and that the company have the necessary human and material resources for the development of the activity.
(b) That the amount of the remuneration corresponding to the whole of the professional shareholders for the provision of services to the entity is not less than 75 per cent of the result prior to the deduction of the corresponding remuneration to the all of the professional shareholders for the provision of its services.
(c) That the amount of the remuneration for each of the professional shareholders meet a series of requirements.
The condition abovementioned in the letter a) is the main point of this document given the latest sentences pronounced by the Spanish Courts. It should be noted that for the fiscal years included in these cases the article 45.2 of the RD 3/2004, of 5 March (Income Tax), is applied because the periods subject to inspection were prior to 2015, and, the last Corporate Income Tax did not include a valuation for such operations.
This article establishes that for related transactions between a professional shareholder and its company “.. .will be understood that the remuneration will coincide with the market value when more than 50 percent of the company’s revenues come from professional activities and that this company has personal and material resources for the development of its activity“.”
However, despite the new regulation of the CIT include a change in the percentage of the revenue of the company, the other requirement (regarding that the entity should have human and material resources suitable for the development of the activity) still remains.
In this sense, the sentence 1293 / 2017, 18 July 2017, shows how the Supreme Court resolves the appeal submitted by a taxpayer that carries out journalistic activities through her company. This person receives a minimum remuneration, while her company invoices to third parties (for the functions performed by this person) a higher amount.
The Supreme Court considers the value agreed by the parties will coincide with the market value in a related transaction if the company has the human and material resources for getting revenues. In the resolved resource revenues are obtained exclusively by the intervention of the shareholder on television being the essential nucleus of services, without the company perform any function to carry out the income or perform any activity that is not related to the intervention of the shareholder. In addition, the professional shareholder perceives a minimum remuneration for the functions carried out in comparison with the turnover that is perceived by its activity through her company and subsequently distributed in the form of dividends, avoiding the application of the personal income tax rates.
When the professional activity can be performed by a person without any company, the remuneration for this activity should be taxed, exclusively, by the Personal Income Tax. The same criterion can be found in the sentence of the High Court Justice of Madrid, of June 14, 2017, which resolves the resource number 1244 / 2015, which also involves a shareholder and its company (100% shares) whose activity is limited to the artistic field.
However, on the approach of the appeal the professional exposes a sentence of the High Court Justice of Murcia from 26 January 2015 which resolves the resource no. 307/2011, concluding that the lack of human and material resources of a company is not decisive, at all, for the taxation of the remuneration perceived by its professional shareholders, and as a result, it cancels the adjustments carried out by the tax inspector. However, the Supreme Court cosiders that the cases and the activities performed are different and both situations cannot be compared.
These sentences states the interest of the Tax Authorities for the transactions related to the professionals and its related companies, mainly in the artistic field.