The Spanish General Directorate of Taxes clarifies that, the adjustment according to arm’s length prices of a tax – related transaction between a company and its sole shareholder, which consists of the rendering of services for no consideration, implies qualifying such adjustment as a shareholder contribution.
This implies the increase of the acquisition value of the shareholder’s interest, providing that the fiscal year it relates to is not time – barred.
Let us remember that, when there is a correction of the agreed consideration in a tax – related transaction, adjusting it to its arm’s length value, besides determining more income for one party and less for the other (for what is considered as the “main transaction”), the Law qualifies, from the tax point of view, the equity transfer that takes place between the parties, as consequence of having agreed to prices different from normal market prices (the so – called, “secondary transaction”). When the difference in value is in favour of the company, it has to be treated as a shareholders’ contribution.
✔ In the case at hand, the Spanish Tax Inspection made a correction at arm’s length prices of the valuation of publicity and public relations services rendered by a company’s sole shareholder and Director to this latter entity. As a result of such adjustment, the Tax Audit had increased the shareholder’s income from professional activity based on normal market values. Consecutively, the taxable result of the company was reduced, in order to reflect the corresponding expense.
✔ The consultation analyses the tax treatment resulting from the provision of such services, in the fiscal years previous to those regularised in the tax audit, when there were services rendered in a tax – related transaction, without correctly reflecting them at the shareholder’s level.
✔ The General Directorate of Taxes considers that the market valuation of the services rendered by the shareholder would have determined a greater income at the shareholder’s level and a tax – deductible expense in the company. As the services were rendered for free, the arm’s length adjustment would determine, for tax purposes, the consideration of such services as a shareholder’s contribution, increasing in the same amount the acquisition value of the shareholder’s interest.
✔ Consequently, the accumulated reserves in the fiscal years during which there was a free rendering of services, prior to the tax audit, can be qualified as shareholders’ contributions and not as reserves deriving from profits, in so far as these fiscal years are not time – barred as, if they were, no change as regards the shareholder’s declared professional activities income or company’s expenses would be possible.