Your tax file becomes a criminal case: what is at stake

The case, in five lines

What is brought

Full voluntary payment if the window of article 305.4 of the Criminal Code is still open and, if not, criminal defence against the complaint, alongside control of the assessment linked to the offence.

Before which court

The Instrucción section of the Tribunal de Instancia (the first instance court) investigates the case and trial falls to the criminal court corresponding to the penalty. The tax authority keeps its assessment and its collection action.

Deadline

Article 131.1 of the Criminal Code sets a five year limitation period for offences whose maximum penalty does not exceed that limit, and ten years where the maximum prison penalty exceeds five years without passing ten, which is the case of the aggravated offence of article 305 bis.

Who can bring it

The taxpayer and anyone involved in the facts may be liable. Under article 31 bis of the Criminal Code, the company may itself be criminally liable, with the penalties of article 310 bis.

Financial risk

Besides prison, article 305.1 of the Criminal Code imposes a fine of between one and six times the amount and the loss of subsidies and tax benefits for three to six years. Article 305.5 warns that the criminal case does not halt the collection action.

The threshold is 120,000 euros per period and per tax, not the total sum

Article 305.1 of the Criminal Code punishes anyone who defrauds the public treasury by evading taxes, withheld amounts or payments on account, wrongly obtaining refunds or enjoying tax benefits, provided the amount defrauded exceeds one hundred and twenty thousand euros. The penalty is one to five years in prison and a fine of between one and six times that amount, unless the position has been regularised.

Article 305.2.a) explains how it is measured: for periodic taxes or taxes with periodic returns, the amount defrauded in each tax or return period is taken, and if those periods are shorter than twelve months, the figure is referred to the calendar year. In other cases, subparagraph b) refers the amount to each item for which a taxable event may be assessed.

That is why the first technical task is to rebuild the calculation year by year and tax by tax. Many amounts presented by the inspection as one global figure fall below the threshold once the periods are properly separated and the adjustments and items available for set off or deduction are applied. That is where it is decided whether there is an offence or merely a debt.

Full voluntary payment closes the door, but it has an expiry date

Article 305.4 treats the position as regularised where the taxpayer has made full acknowledgement and payment of the tax debt before being notified of the opening of review or investigation actions, or, where none has taken place, before a complaint directed against him is lodged, or before the public prosecutor or the investigating judge take steps giving him formal knowledge of the proceedings.

Article 252 LGT carries this to the administrative side: the authority will not refer the matter to the courts or send the file to the prosecutor unless it appears that the taxpayer has not regularised. And it specifies what payment means: self assessment and simultaneous payment of the quota, the late payment interest and the surcharges legally accrued at the date of payment. Paying the quota alone is not regularising.

Two effects often go unnoticed. Article 305.4 extends regularisation to debts paid once the authority's right to determine them has lapsed, and adds that it prevents prosecution for accounting irregularities or other instrumental falsifications committed earlier, exclusively in relation to the debt regularised. It is a broad protection, which is why the date and scope of the payment are documented with great care.

The tax authority assesses and collects even with a criminal case open

Article 250.1 LGT requires the proceedings to continue where signs of an offence appear, issuing separate assessments for the items linked to the possible offence and for those that are not. Article 253.1 LGT governs the proposed assessment linked to the offence, which is notified with a hearing to make submissions within fifteen calendar days from the day after notification.

Article 305.5 of the Criminal Code and article 255 LGT agree on the essentials: the criminal case does not halt the collection action, unless the judge suspends enforcement upon security being provided, or exceptionally with total or partial waiver where enforcement could cause irreparable harm or harm very difficult to repair. The voluntary payment period opens once the complaint is recorded as admitted.

That is why the defence is organised on two levels from day one. On the criminal side, intent, quota and authorship are disputed. On the administrative side, collection is contained, suspension is requested from the judge, and seizures are watched so they do not destroy the company's activity while the case is investigated, because disputing the offence is one thing and being left with no company to defend is another.

The assessment linked to the offence is not appealed: the judge sets the quota

Article 254.1 LGT provides that no administrative appeal or claim lies against the assessment issued under article 250.2 LGT, and that it is for the criminal judge to determine in the judgment the quota defrauded. Against the other assessment, covering the items not linked to the offence, paragraph 2 does open the ordinary appeals and claims.

Article 257 LGT explains the later adjustment. If the amount set in the criminal case differs from the one assessed, the assessment is modified to match the judgment. If no offence is found because the tax obligation did not exist, the assessment is annulled. And if no offence is found for any other reason, the inspection is rolled back to the point before the proposal, so that the appropriate report can be drawn up.

That map shows where each battle is fought. The quota is disputed in the criminal case, not before the TEAR, and that is why the party's expert report rebuilding the calculation is prepared for the judge. Article 257.2.c) LGT also warns that, in the assessment resulting from the rollback, the facts held proven in the judgment cannot be challenged.

The aggravated offence raises the penalty to six years and limitation to ten

Article 305 bis punishes with two to six years in prison and a fine of between two and six times the amount where the quota defrauded exceeds six hundred thousand euros, where the fraud is committed within a criminal organisation or group, or where the use of interposed persons, businesses or fiduciary instruments, tax havens or zero tax territories conceals or hinders identification of the taxpayer, of the amount or of the assets.

The consequence goes beyond the penalty. Article 131.1 of the Criminal Code sets a ten year limitation period for offences whose maximum penalty is imprisonment of more than five and up to ten years, and five years for the rest. Since the basic offence of article 305 reaches five years and the aggravated one six, the prosecution window doubles when one of those circumstances is found.

The company answers on its own, and its compliance model may exonerate it

Article 310 bis provides its own penalties for a company liable for these offences: a fine of between one and two times the amount defrauded where the individual's offence carries more than two years in prison, of between two and four times where it exceeds five years, and the loss of subsidies and tax benefits for three to six years, with a possible ban on contracting with public authorities.

Article 31 bis sets out when the company is liable and, above all, when it is exempt: if the management body adopted and effectively implemented, before the offence, organisation and management models with suitable supervision and control measures, if their oversight was entrusted to a body with autonomous powers, if the individuals fraudulently evaded those models, and if there was no omission or insufficient exercise of that oversight.

The same article adds two useful points. Where those circumstances are only partly proved, they count in mitigation of the penalty. And in small companies, those allowed to file an abbreviated profit and loss account, the oversight functions may be assumed directly by the management body, which opens that defence to businesses with no compliance structure.

How we run the case, step by step

1. 1

   Rebuilding the quota by year and by tax

   We apply the rule of article 305.2 of the Criminal Code and separate each tax period and each item, with the adjustments and amounts available for set off or deduction. If no figure exceeds one hundred and twenty thousand euros, the matter stops being criminal and becomes tax again.

2. 2

   Checking whether the regularisation window is still open

   We fix the exact date the opening of actions was notified and compare it with the date of payment. If it has not yet arrived, article 252 LGT requires self assessment and simultaneous payment of the quota, late payment interest and surcharges accrued at the date of payment.

3. 3

   Submissions against the assessment proposal linked to the offence

   Article 253.1 LGT allows fifteen calendar days from the day after notification. We dispute the facts, the calculation and the split between intentional and non intentional items, and where appropriate we notify the proportional calculation option provided in paragraph 3.

4. 4

   Defence during the criminal investigation

   We appear from the outset, produce our own expert evidence on the quota and work on the subjective element, because article 305.1 requires defrauding and the mere submission of returns neither excludes nor by itself establishes the fraud.

5. 5

   Containing collection while the case runs

   We ask the judge for the suspension of enforcement allowed by article 305.5 of the Criminal Code and article 255 LGT, with security or, if none can be provided, with total or partial waiver where enforcement could cause irreparable harm or harm very difficult to repair.

6. 6

   Final adjustment of the assessment to the judgment

   Article 257 LGT requires the assessment to be adjusted to the quota set in the criminal case, annulled if there was no tax obligation, and the inspection rolled back if no offence is found for another reason. That adjustment has to be claimed, it does not arrive on its own.

The law that applies

• Art. 305 CP. Defines the offence against the public treasury for an amount defrauded above one hundred and twenty thousand euros, with one to five years in prison and a fine of between one and six times that amount, sets the rule of counting per period and item, governs regularisation as a ground of exclusion, allows separate assessments and warns that the criminal case does not halt collection. BOE-A-1995-25444
• Art. 305 bis CP. Raises the penalty to two to six years in prison and a fine of between two and six times the amount where the quota exceeds six hundred thousand euros, where the conduct takes place within a criminal organisation or group, or where interposed persons, fiduciary instruments or zero tax territories hinder identification of the taxpayer, the amount or the assets. BOE-A-1995-25444
• Art. 131 CP. Sets the limitation periods for offences according to the maximum penalty: ten years where imprisonment exceeds five and does not pass ten, and five years for the remaining offences, with the exceptions it lists and the rule of the penalty requiring the longest period where the penalty is composite. BOE-A-1995-25444
• Art. 252 LGT. Prevents referral to the courts or to the prosecutor unless it appears that the taxpayer failed to regularise by full acknowledgement and payment before the opening of actions was notified or a complaint lodged, and requires self assessment with simultaneous payment of quota, late payment interest and accrued surcharges. BOE-A-2003-23186
• Art. 253 LGT. Governs the proposed assessment linked to the offence, with a hearing of fifteen calendar days, the later assessment with prior or simultaneous authorisation, the referral of the file, and the rule of two separate assessments where intentional and non intentional items coexist in the same tax and period. BOE-A-2003-23186
• Art. 254 LGT. Excludes any administrative appeal or claim against the assessment linked to the offence, gives the criminal judge the task of determining the quota defrauded in the judgment, and preserves the ordinary appeals against the assessment of items not linked to the possible offence. BOE-A-2003-23186

Each article checked against the consolidated text published in the BOE (the Spanish official gazette).

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