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Changes in the Spanish transfer pricing legislation by the Tax Reform

Published in Transfer pricing news

In the framework of a far-reaching Tax Reform, a new Corporate Income Tax Law was passed and enacted by the Parliament, effective for the tax years beginning as of January 1st, 2015.

The new legislation introduces some changes to the Spanish transfer pricing (TP) regulatory framework.

Related-party definition:

  • Direct shareholding threshold is increased from 5% (1% if the company is listed) to 25%
  • Director’s fees are excluded from the scope of the TP rules
  • The relationship case of “a company and the directors of other group company” has been removed in the new Law

TP documentation requirements:

  • Exclusions of the TP documentation requirements are transferred from the previous Regulations to the Law in similar terms
  • However, the new Law mandates simplified TP documentation requirements for groups with a turnover lower than 45 million euros
  • TP documentation requirements will be defined in new Regulations to be approved by the Government

TP methods and hierarchy:

  • Removal of the restriction to apply profit-based methods only when traditional transactional methods cannot be applied
  • Most appropriate method rule introduced into the law (before in the Regulations): transfer pricing method selection should be grounded on (i) the nature of the controlled transaction, (ii) the availability of reliable information, and (iii) the comparability between the comparables and the controlled transaction
  • “Sixth method” allowed: when none of the OECD-mandated transfer pricing methods can be reliably applied, other methods or valuation techniques can be used inasmuch as they are consistent with the arm’s length principle

Permanent establishments (PEs)

  • Spanish companies having a foreign PE must value its “interbranch dealings” at arm’s length when a Double Tax Treaty (following the 2010 Model) is applicable
  • The above is relevant for the calculation of the taxable income attributable to the PE at source and potentially exempt in Spain
    Advance Pricing Agreements (APAs)
  • APAs may have backwards effects in non-statute-barred tax years, if agreed
  • APAs can be amended in case of significant modifications of the economic circumstances (critical assumptions)

Secondary Adjustment

  • Secondary adjustment is maintained in the Spanish TP legislation
  • In case of direct shareholding relationship, a transfer pricing adjustment gives rise to an secondary equity transaction between the taxpayer and its affiliate
  • Rules previously regulated in the Regulations are now introduced into Law (solving the illegality cause determined in the recent Supreme Court Decision regarding the existing regulations)
  • Secondary adjustment effect could be avoided by a “patrimonial restitution” (intercompany loan recognition) in accordance with the requirements to be set in the new Regulations

TP penalty regime

  • TP penalties in case of TP adjustment or when the prices are not within the arm’s length range in the documentation are maintained (15% of the TP adjustment)
  • TP penalties for formal infringement of the TP documentation requirements (without a TP adjustment) are reduced from 1,500 euros per data/ 15,000 euros per dataset to 1,000 euros per data/10,000 euros per data set, and this penalty cannot exceed the lower between:
    • 10% of the total amount of controlled transactions
    • 1% turnover

Safe harbors

  • Existing safe harbor´s rules for working partner’s salary in certain professional service companies have more flexible requirements (this safe harbor will be regulated in the new Law, instead of the Regulations)
  • Scope of the TP rules
  • The valuations made by the Spanish Tax Authorities based on the transfer pricing rules for the purposes of the Corporate Income Tax, Personal Income Tax and Non-Resident Income Tax will be independent of the valuations for the purposes of other taxes (VAT, customs duties, transfer tax, inheritance tax)

Next steps

  • After the new law approval, the Government will probably approve new Corporate Income Tax Regulation during 2015, developing some transfer pricing issues such as the content of the transfer pricing documentation, requirements to avoid secondary adjustment effects and APA procedural rules.