Limited Companies and Simulation: Real Tax Risks

The AEAT focuses its attention on private limited companies that invoice services actually rendered by their individual shareholders, above all when there are no material means or own personnel and the sole apparent purpose is to pay less tax. In such cases, it may apply Article 16 of the General Tax Act (LGT) on simulation and “dissolve” the company for tax purposes, attributing the income directly to the shareholder and demanding interest and penalties.

In practice, the focus is usually on professional or service companies (consultancy, marketing, architecture, law, private medicine, commercial agents, etc.) where the key to the business is the personal provision of services by the shareholder. When the Tax Agency detects that the private limited company (SL) merely serves to invoice and accumulate profits in Corporate Income Tax, taxed in 2026 at rates of between 19% and 25%, while the shareholder receives low remuneration subject to Personal Income Tax, whose top marginal rate reaches 45% in Madrid, it suspects an interposed company.

This does not mean that all structures involving companies are abusive, but it does require justification of valid economic reasons, real organisation and market-rate pricing.

The same applies if you live outside Spain and do business here through an SL. If you plan to set up a limited company in Spain as a non-resident, give it its own means and real activity from the start: the Tax Agency uses the same criteria to decide whether it is an interposed company.

Impatriates are in a similar position. If you move to Spain under the Beckham Law (régimen de impatriados) and intend to run your activity through your own Spanish company, check beforehand how that structure affects both the regime and the substance of the company.

Simulation is expressly governed by Article 16 of Law 58/2003, the General Tax Act, which establishes that, where simulation exists, the taxable event charged shall be that actually carried out by the parties and that such classification only produces tax effects. In the event of simulation, the Administration must regularise in accordance with economic reality, demanding late-payment interest and, where applicable, a penalty.

This provision is connected to other key points of the system:

• The principle of classification of facts according to their true nature under Article 13 of the LGT.
• The penalty regime under Article 191 of the LGT (failure to pay tax due), which is commonly applied in these cases, particularly where the use of interposed persons is identified as a fraudulent device.
• The related-party transactions legislation of the Corporate Income Tax Act (Articles 18 et seq. of Law 27/2014 and its implementing regulations), relevant where there is no simulation but there are shareholder-company relationships requiring arm’s-length valuation.

The AEAT’s guidance note on the interposition of companies by natural persons states that, where the company does not have sufficient personal and material means to carry out the professional activity, it may be regarded as a mere formal interposition, proceeding to regularisation through the instrument of simulation. The central idea is that the company lacks its own substance and acts merely as a screen between the professional and their clients.

The same note also targets companies that make homes, vehicles or boats available to the shareholder without a contract. If you are buying or selling a property in Spain through an SL, review the structure before signing. Through Velora Realty, the firm’s real estate branch, we manage the purchase or sale, draft and review the contracts and handle the tax side of the transaction.

Administrative doctrine and case law have developed several risk indicators:

• A company with no employees or with merely administrative personnel, while the shareholder provides all professional services.
• Absence of offices, equipment or minimum infrastructure where the activity would normally require it.
• Contracts and commercial relationships managed directly by the shareholder, without any real involvement of the company.
• Income distribution that transfers the greater part of the profit to the company, leaving the shareholder with reduced remuneration for Personal Income Tax purposes.

In several recent judgments, the Supreme Court has upheld the possibility of classifying as simulated those companies interposed by professionals where they do not respond to valid economic reasons and do not have sufficient means, consolidating a line of case law reinforcing the use of Article 16 of the LGT in this area. Nevertheless, it has also qualified that the Administration must justify the simulation and cannot arbitrarily interchange this instrument with other powers (such as regularisation for conflict in the application of the rule or for related-party transactions).

Simulation vs. Related-Party Transactions in Interposed Companies

In practice, the central dispute with the Tax Inspectorate revolves around the company’s technical and organisational means. The AEAT tends to consider that, without own personnel or structure, the private limited company is purely instrumental. However, case law has qualified the need for material means in activities where the shareholder’s intellectual work constitutes the principal asset.

In its Resolution of 24 July 2023 (RG 00/04117/2020), the TEAC examines a case of commercial advisory services in the car sector in which the Tax Inspectorate had found simulation. The taxpayer argued that, in professional activities, the shareholder’s work alone may be enough without substantial material infrastructure. The TEAC rejected that argument because the company was not a professional company (sociedad profesional) but an ordinary limited company, and upheld the simulation on the basis of a set of indicators, including the lack of material and human resources.

The resolution confirms that, where the company does not genuinely contribute organisational value and is limited to channelling invoices, the classification of simulation may be correct, with the consequence of attributing the service income to the shareholder and recalculating the penalties following the criterion established by the Supreme Court.

When the Tax Agency regularises an interposed company for simulation, the following consequences are common:

• Personal Income Tax assessments against the shareholder for the non-statute-barred tax years.
• Adjustments to the Corporate Income Tax of the interposed entity.
• Penalties for failure to pay tax due, under Article 191 of the LGT, ranging from 50% to 150% of the unpaid tax, depending on whether the infringement is minor, serious or very serious.
• In extreme cases, assessment of whether there are indications of a criminal offence against the Public Treasury, in which case the Administration must follow the specific referral regime to the Public Prosecutor’s Office (Ministerio Fiscal).

The most recent doctrine of the Supreme Court (judgment 770/2023 of 8 June 2023, appeal 5002/2021) has clarified how to calculate the basis of the penalty in simulation cases, stating that regard must be had to the difference between the amount not paid by the natural person and the amount already paid by the simulated company, thereby avoiding double penalisation of the same income. The same judgment requires the Administration to justify why it treats the facts as simulation rather than as related-party transactions; where the conduct fits both, the classification more favourable to the offender applies.

This interpretation has been adopted by the TEAC in resolutions such as that of 24 July 2023, representing a change of approach in favour of the taxpayer.

For many business owners, the action of the Spanish Tax Inspectorate in these cases is perceived as an abuse by the Tax Authorities, particularly when structures that had been operating for years without prior objection are called into question. However, from the Administration’s perspective, corporate interposition without substance is equated with avoidance behaviour justifying the application of the simulation provisions.

1. Analyse the opening agreement and scope: review the tax years, the taxes at issue and the grounds for the possible indication of simulation.
2. Gather evidence of means and organisation: lease agreements, payroll records, subcontracting arrangements, IT equipment, tools, etc.
3. Document valid economic reasons: explain why the company exists beyond mere tax saving (limitation of liability, image before clients, growth capacity, admission of new partners, etc.).
4. Assess whether the case better fits related-party transactions rather than simulation, defending the reality of the company and the compliance with arm’s-length pricing of internal transactions.
5. Seek specialist advice in tax law and, where applicable, prepare the strategy for a potential economic-administrative claim.

When the Tax Inspectorate issues an assessment classifying an interposed company as simulated, the taxpayer may lodge an economic-administrative claim before the competent Regional Economic-Administrative Court (Tribunal Económico-Administrativo Regional — TEAR) and, where applicable, a further appeal (recurso de alzada) before the TEAC when the amount at stake exceeds €150,000. The general time limit for the claim is one month from notification, in accordance with the general regime for remedies in tax matters.

In the economic-administrative proceedings, the following points are typically disputed, among others:

• Whether or not there is genuine activity in the company (personal and material means).
• The correctness of the legal classification: simulation versus other instruments such as related-party transactions or conflict in the application of the rule.
• The adequacy of the penalty calculation, particularly following the Supreme Court case law on the penalty basis in cases involving interposed companies.

The doctrine the TEAC establishes on a repeated basis, such as the criterion on the penalty basis in the aforementioned resolution of 24 July 2023 (RG 00/04117/2020), is binding on the regional economic-administrative courts and on the rest of the tax administration. That is why these resolutions can tip the balance in favour of the taxpayer where sufficient economic substance is evidenced or where the AEAT has misused the simulation instrument instead of correctly applying other regularisation mechanisms.

In the event of dismissal, the taxpayer may resort to the contentious-administrative jurisdiction, where the Supreme Court has been developing a more sophisticated doctrine on corporate interposition, the limits of Article 16 of the LGT and the need for enhanced reasoning when simulation is alleged.

Nevertheless, in light of the AEAT’s public guidance note on the interposition of companies by natural persons, as well as various resolutions of the Economic-Administrative Courts and the recent case law of the Supreme Court, it is advisable that any analysis of specific documents focuses on:

• How the personal and material means of the company are described.
• What indicators are used to justify simulation versus other instruments.
• How the penalty basis is calculated.

At Martínez-Cardós Abogados, a Madrid law firm specialising in advice to non-residents (tax, inheritance and corporate matters), inheritance and Spanish tax law, we often see that detailed work on the facts (actual organisation, contracts, payment flows) and strategic use of current doctrine make the difference between confirming a simulation or redirecting the case to related-party transactions, with a lesser economic impact.

The interposition of private limited companies by natural persons is today one of the most sensitive issues in business taxation in Spain, with a combination of AEAT criteria, TEAC doctrine and Supreme Court case law that demands very careful case-by-case analysis. A well-designed corporate structure, with real means and arm’s-length pricing, may be entirely valid; a fictitious company, on the other hand, may generate significant assessments, penalties and even criminal risks.

If you are considering setting up a company to channel your professional activity, or you are already involved in an inspection in which a possible interposed private limited company or even a simulation is being questioned, it is highly advisable to obtain specialist advice in Spanish tax law and in inspection and economic-administrative proceedings. A preventive analysis or an adequate technical defence can avoid considerable future costs.

If the company holds property, or you plan to buy or sell a home in Spain, Velora Realty, the firm’s real estate branch, can handle the whole transaction: managing the purchase or sale, drafting and reviewing the contracts and dealing with its taxation.

With more than 35 years in the sector, Martínez-Cardós Abogados advises on tax inspections and economic-administrative claims (reclamaciones económico-administrativas) arising from an interposed company. Contact our firm to discuss your case.

What is an interposed company (sociedad interpuesta) for Spanish tax purposes?

An interposed company is one that formally appears as a service provider or holder of an activity, but which in economic reality barely contributes means or organisation, being limited to channelling income that belongs to a natural person. In such cases, the AEAT may apply Article 16 of the LGT and consider the interposition as simulated, attributing the income directly to the shareholder.

Does simply having no own office mean that the Tax Authorities will consider simulation to exist?

Not necessarily. The absence of an office or physical infrastructure is an indicator, but the courts insist that this is a matter of evidence and that the nature of the activity must be assessed and whether the professional’s personal work can, by itself, constitute the principal means. In highly knowledge-intensive activities, there may be genuine activity with limited means.

What is the time limit for the Tax Authorities to review my structure with a private limited company?

As a general rule, the limitation period for tax obligations is four years, running from the day following the end of the filing deadline for the relevant return, in accordance with the general regime under Article 66 of the LGT. Within that period, the Tax Inspectorate may initiate proceedings and, if it identifies simulation, regularise the non-statute-barred tax years.

How can I reduce the risk of the AEAT treating my private limited company as an interposed company?

It is essential to endow the company with its own personal and material means, document valid economic reasons (organisation, expansion, limitation of liability, admission of new partners) and establish reasonable remuneration for the shareholder’s work, consistent with the market. Furthermore, it is advisable to properly document the shareholder-company relationships and comply with the related-party transactions regime.

If an assessment has already been raised against me for simulation, is it worth appealing?

It depends on the case, but the recent evolution of the Supreme Court and the TEAC on interposed companies and the penalty basis opens genuine avenues of defence. Where there is effective activity in the company or the Tax Inspectorate has not adequately substantiated the simulation, it may be viable to appeal in the economic-administrative proceedings and, where applicable, in the contentious-administrative jurisdiction, supported by robust documentary and expert evidence.

Article written by Mario Martínez-Cardós Bada, Spanish lawyer specializing in tax and inheritance law.