The issue presented before the Spanish Supreme Court is if and how the arm’s length principle apply to the salary of the owner of a consultancy company for personal services provided to an independent company, i.e. if the price agreed for provision of these services to an independent party is a CUP in relation to the salary of the owner. “In order to determine the market value of the services provided by Mr. Primitivo to the company LA REHOS, S.L., is based on the value of the relationship between LA REHOS, S.L. and the third parties from which it obtains the income for the services rendered by Mr. Primitivo with the necessary corrections to obtain the equivalence: those derived from the expenses and costs related to the activity of Mr. Primitivo incurred by or residing in the entity LA REHOS, S. L. and those that originated in the expenses or costs related to the services provided by Mr. Primitivo to UNIPREX SAU and to the different written media initially accounted for in the rest of the related entities and subsequently transferred to LA REHOS, S.L., by means of internal invoicing.” In a judgement handed down on 7 July 2021 the National High Court set aside the assessment of the tax authorities, and an appeal was then filed with the Supreme Court. Judgement of the Supreme Court The admission of the appeal was allowed by the Court. “However, the Supreme Court has not ruled on how to regularise professionals who obtain their income through professional partnerships in the case of the provision of intuito personae services, and the tax administration has considered that they should be regularised as related-party transactions by means of valuation at market prices, considering that, in order to determine the normal market value, the price at which the third-party company contracted the professional partnership through which the partner provided his services should be taken into account.” A judgement will be handed down on the following issues Determining whether section 2 of Article 45(2) of Royal Legislative Decree 3/2004, of 5 March, approving the revised text of the Personal Income Tax Act, establishes a presumption iuris tantum or iuris et de iure, by stipulating that the consideration effectively paid shall be deemed to coincide with the normal market value in transactions corresponding to the exercise of professional activities or the provision of personal work by individuals to companies in which more than 50% of their income comes from the exercise of professional activities, provided that the entity has the personal and material resources to carry out its activities. Specify, in cases where the service provided by a natural person to the related company and the service provided by the related company to independent third parties is substantially the same, being the provision of an intuito personae service, and with the company lacking the means to carry out the transaction except through the necessary and indispensable participation of the natural person – not providing added value (or this being residual) to the work of the natural person – if it is in accordance with the methodology for related-party transactions in 2006, to consider that the consideration agreed for this second transaction is the market price of the good or service in question. Likewise, in the same circumstances described above, specify whether it is in accordance with the methodology for related-party transactions for 2007, to consider that the consideration agreed for this second transaction is a “comparable non-related transaction”, it not being necessary to incorporate a valuation adjustment for the mere recognition of the existence of the company, and this without prejudice to the corrections that, in application of the comparable free price method, should be made for the fiscalcularly deductible expenses that are centralised in the company. Click here for English translation Click here for other translation ...

“XZ SA” is a Spanish parent of a tax consolidation group which is part of a multinational group. The Spanish group participates in the group’s cash pooling system, both as a borrower and as a provider of funds. The objective of cash pooling agreements is to manage the cash positions of the participating entities, optimising the group’s financial results by channelling the excess liquidity of the group companies that generate it to the group companies that need financing, resorting to third-party financing when the group itself is not able to finance itself. This achieves greater efficiency in the use of the group’s funds, as well as improving their profitability and reducing the administrative and general financial costs of the entities participating in the agreement. The tax authorities issued an assessment in which the interest rates on deposits and withdraws had been aligned and determined based on a group credit rating. A complaint was filed with the TEAC by XZ SA. Judgement of the TEAC The TEAC dismissed the complaint and upheld the tax assessment. The asymmetry in the treatment given by the taxpayer to credit and debit transactions in cash pooling is not admissible: As this system is configured, both types of transactions should have the same treatment; The analysis of the logic and philosophy that exists in transactions with financial institutions is not transferable to the cash pooling transactions involved here; in this, transactions that are channelled through the leading entity of the cash pooling, it follows from the functional analysis that it acts as a service provider managing and administering the cash pooling, but not as a credit institution that would assume the consequences of the contributions and drawdowns to/from the cash pool. And all the companies that are part of the cash pooling can be either contributors or receivers of funds, without it being generally known a priori what the debit or credit position of each of them will be. Reference is made to previous case law – TEAC, Case Rec. 6537/2017 and Supreme Court ruling of 5 November 2020 (appeal 3000/2018). Click here for English translation Click here for other translation ...

Where accurate delineation of the actual transactions determines that a cash pool leader is carrying on activities other than coordination or agency functions, the pricing of such transactions would follow the approaches included in other parts of this guidance, as appropriate ...

In general, a cash pool leader performs no more than a co-ordination or agency function with the master account being a centralised point for a series of book entries to meet the pre-determined target balances for the pool members. Given such a low level of functionality, the cash pool leader’s remuneration as a service provider will generally be similarly limited ...

“X Iberica SA” is a Spanish subsidiary of a multinational group and also a participant in the group’s cash pooling system, both as a borrower and as a provider of funds. When the group is not able to finance itself, the vehicle called THE X TES US comes into play, which raises these funds from outside the group as a group and on the basis of the group’s credit quality. The objective of cash pooling agreements is to manage the cash positions of the participating entities, optimising the group’s financial results by channelling the excess liquidity of the group companies that generate it to the group companies that need financing, resorting to third-party financing when the group itself is not able to finance itself. This achieves greater efficiency in the use of the group’s funds, as well as improving their profitability and reducing the administrative and general financial costs of the entities participating in the agreement. The tax authorities issued an assessment in which the interest rates on deposits and withdraws had been aligned and determined based on a group credit rating. A complaint was filed with the TEAC by X Iberica SA. Judgement of the TEAC The TEAC dismissed the complaint and upheld the tax assessment. The asymmetry in the treatment given by the taxpayer to credit and debit transactions in cash pooling is not admissible: As this system is configured, both types of transactions should have the same treatment; The analysis of the logic and philosophy that exists in transactions with financial institutions is not transferable to the cash pooling transactions involved here; in this, transactions that are channelled through the cash pooling lead entity, it follows from the functional analysis that it acts as a service provider managing and administering the cash pooling, but not as a credit institution that would assume the consequences of the contributions and drawdowns to/from the cash pool. And all the companies that form part of the cash pooling can be either contributors or receivers of funds, without it being generally known a priori what the debtor or creditor position of each of them will be. For the determination of the arm’s length price, in the selection of the type of transaction used as comparable, it is not appropriate to start from the stand alone credit rating of the operating entities or economic beneficiaries of the financing, in this case, the Spanish subsidiary X IBERICA SA, but instead what is appropriate is the credit rating of the group. Excerpts “In the cash pooling system to which X Iberica SA belongs, the cash pool leader does not assume the same position as a bank, but merely administrative and management tasks, but does not assume the risk of default either from the economic or contractual point of view (in fact, there is no mention of this issue in XF BV’s annual report, nor is it mentioned in the current account agreement), but rather this risk is assumed by all the participating entities. The lead institution centralises the cash and grants financing to cash pooling institutions, but on behalf of the contributing institutions, which are the ones that actually have the funds to lend and assume the risk of default. In the context of the functional analysis referred to in the previous legal basis of this resolution, we must reiterate that the benefits of the operation accrue to all participants, and it would therefore be inconsistent to assign the functions of a financial institution to the centralised cash pooling system’s management entity, or the benefit that would accrue to it if we assign a higher rate to the loans than that applied to fund-raising. The functions that the claimant defends in its allegations as being assigned to the system’s managing entity are clearly limited, especially as regards decisions regarding the entities that use this system, which are the group entities according to their funding needs or surpluses. In this respect, we saw that the Guidelines link a greater risk assumed by the parties to a transaction with the assumptions of greater control over the activity we are analysing, which in this case is certainly scarce. We must therefore uphold the settlement arrangements and dismiss the claimant’s claims on this point as well.” Click here for English translation Click here for other translation ...

A & W AG, a company based in Germany, had maintained a permanent establishment in Austria which provided “distribution and support of software” services. No profits had been attributed to the Austrian permanent establishment. An assessment was issued where profits for FY 1998 to 2002 had been determined by the tax authorities using the cost plus method with a mark up of 9.5% to 7.5% for the years 1998 to 2002. A & W AG appealed against the tax assessments and argued that a mark up of 2% would be more appropriate. The Administrative Court of Appeal remanded the case to the Unabhängiger Finanzsenat (UFS). Judgement of the UFS The UFS decided predominantly in favour of A & W AG. The tax office explained that, based on empirical values ​​and relevant literature, mark up rates of between 5% and 15% should be regarded as customary. The mere reference to these empirical values ​​did not convince the UFS, since the facts to be assessed were not specifically addressed. The UFS explained that the disclosure of anonymous comparative values ​​would not provide any indication of the respective taxpayer and would not violate the duty of confidentiality. The UFS came to the conclusion that mark up of 2% requested by A & W AG was appropriate. Click here for English translation Click here for other translation ...

A & W AG, a company based in Germany, had maintained a permanent establishment in Austria which provided “distribution and support of software” services. No profits had been attributed to the Austrian permanent establishment. An assessment was issued where profits for FY 1998 to 2002 had been determined by the tax authorities using the cost plus method with a mark up of 9.5% to 7.5% for the years 1998 to 2002. A & W AG appealed against the tax assessments and argued that a mark up of 2% would be more appropriate. Judgement of the Court The Administrative Court of Appeal found the mark up determined by the tax authorities to be incomprehensible. The tax authority would have had to justify the mark-ups, for example by submitting specific empirical values ​​from comparable companies. The case was remanded to the court of first instance, where in a decision of April 28, 2010 ( RV/3837-W/09 ), a cost mark-up of 2% was found to be appropriate. Click here for English translation Click here for other translation ...