6 October, 2014

The Secondary Adjustment in Spanish Transfer Pricing Rules

The Spanish Supreme Court, in a recent resolution, has annulled part of the article of Spanish Corporate income tax regulations relating to the tax treatment of the difference between the agreed value and the market value of a related-party transaction, in the part not corresponding to any share capital participation.

The Court understands that this is a matter that should be ruled in a Law, but not in the regulations developing such Law, (Court Resolutions, 3rd – 2º Section, Rec. 8/2009, of May 27, 2014 – it annuls article 21. 2 bis of Royal Decree 1777/2004).

In order to comply with the Court criterion, the Draft Corporate income tax Law,  currently under process, rules again the so-called Secondary adjustment, including the contents of the regulations recently annulled.

In order to understand these regulations, it is convenient to know: which types of adjustments are applicable between related parties? Do they apply automatically? Let us explain it to you.

The primary adjustment: it corrects the results declared by a company when they do not correspond to the market value that would be agreed to between independent parties.

The correlative adjustment: it is the opposed adjustment to the previous one. It adjusts the benefits obtained by the related parties to normal market values.

The so- called secondary adjustment: it qualifies the transfer of funds between the tax related parties and makes the actual allocation of profits consistent with the primary adjustment, (it may take the form of dividends or profit distribution, for example).

✔ Let us suppose that Company A renders services to Company B (A owns 100% of B’s share capital) for a price of 1,500.00 Euro when their market value is of 1,000.00 Euro. As a consequence of the application of the arm’s length rule to this transaction, the following corrections would apply:

Company B: reduction of expenses by practising a (primary) adjustment of 500.00 Euro.

Company A: adjustment in the same amount, but of opposite sign to the previous one.

As the funds corresponding to the profits transferred would remain in A, as they would not be returned between the intervening parties, the situation would not be restored to a normal market value scenario between independent parties.

Consequently, a third correction (secondary adjustment) should be made, to grant the appropriate tax treatment to the real qualification of the relevant transaction.

Since A is the parent Company of B, the tax treatment that would apply to the funds transferred would be that of a dividend.

✔ The new transfer pricing regulations that will very likely be passed by the Spanish Government, exclude from the application of this secondary adjustment the situation in which the funds transferred are restored between the intervening parties. The concrete circumstances that will need to be met to avoid this adjustment are still pending regulations so do not miss our new articles as there is more to come soon.


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