The tax office says your company is a sham: defend it

The case, in five lines

What is brought

Defence against the adjustment made as a related-party transaction (article 18 LIS) or on the ground of simulation (article 16 LGT) during the inspection and, afterwards, an economic-administrative claim and a contencioso-administrativo appeal against the personal income tax assessment and against the penalty.

Before which court

The inspectors during the proceedings. Afterwards, the TEAR (the regional economic-administrative tax tribunal) and, where the amount exceeds 150,000 euros, the TEAC (the central tax tribunal) on appeal. In court, the Sala de lo Contencioso-Administrativo of the Tribunal Superior de Justicia (the regional high court) for TEAR decisions, or that of the Audiencia Nacional (the national high court) for TEAC decisions. Not the Tribunal de Instancia (the first-instance court).

Deadline

Fifteen days to make submissions against the disagreement report. One month from the day after notification of the assessment, and another from notification of the penalty, to lodge the claim (article 235.1 LGT). Two months from the day after notification of the decision ending the administrative route for the court appeal (article 46.1 LJCA), a lapse period. Behind all this, the four-year limitation period on the right to assess (article 66 LGT), from the day after the filing deadline for each year ends.

Who can bring it

You, as the personal income taxpayer to whom the income is attributed, and the company, as the related party, which may join your claim and whose corporate tax must be corrected in parallel. On the other side, the Agencia Estatal de Administración Tributaria (the State Tax Agency) and, in court, the central State administration.

Financial risk

The personal income tax on the difference, late payment interest and a penalty of 50 to 150 per cent depending on whether there was concealment or fraudulent means; appealing forfeits the reduction for acceptance. In court, costs go against the party whose claims are all rejected, which the court may cap (article 139 LJCA). If the simulation finding stands and the tax for a single year exceeds 120,000 euros, there is criminal exposure.

The tax office has two routes, and they are not defended the same way

When the inspectors examine a professional who invoices through a company, they rarely dispute that the service was provided. They dispute to whom the income belongs and at what value. The first tool is article 18 LIS (the Corporate Income Tax Act), which requires transactions between a company and its shareholders holding at least 25 per cent of the capital, or its directors, to be valued at market, and which article 41 of the Personal Income Tax Act carries over to the shareholder's return. Being a director is enough for the relationship to be a related one, even with a smaller stake.

With a related-party adjustment, the authority accepts that the company exists and does what it says: it only raises to market value the price the company paid you and taxes the difference in your personal income tax. With simulation, by contrast, it declares in the assessment itself that the company is a mere appearance and that the taxable event actually carried out is yours as an individual, under article 16.1 LGT (the General Tax Act). Article 16.3 LGT adds late payment interest and, where appropriate, the relevant penalty.

Between the two sits the conflict in the application of the tax rule under article 15 LGT, for real but notoriously artificial arrangements: it requires a prior favourable report from the advisory committee and, under article 206 bis LGT, it can only be penalised where a published administrative criterion exists for substantially identical cases. The route chosen decides whether there is a penalty, whether it can be very serious and whether the case moves towards criminal territory. That is why the classification is attacked first and the figures afterwards.

What decides the case: what the company brings that you do not

In several judgments of June 2023, the Tribunal Supremo (the Supreme Court) examined professionals who provided highly personal services through companies in which they were practically the sole shareholders, and set the criterion inspectors apply today. It starts from the premise that using a company is not unlawful in itself. But where the company lacks means that add value, or its contribution is residual, the service the shareholder provides to the company and the service the company provides to its clients are, in substance, the same.

The consequence is devastating if the defence is not prepared: the authority may take as the market value of your work the price the company charged its clients, deducting only the company's tax-deductible expenses. Almost all the profit ends up in your personal income tax, at your marginal rate, and the gap between the corporate tax rate and your income tax rate, which was the whole saving, becomes the amount claimed from you, with interest.

The defence, therefore, is not to repeat that the company is lawful, but to prove what the company brings that you do not: employees, other professionals working through it, premises, equipment, a brand, clients who contract with the company rather than with you, risks the company bears. Each proven element of the company's own value reduces the adjustment. And if that value is significant, the identity between both services falls away and the inspectors must justify the value using the methods of article 18.4 LIS and a genuine comparability analysis.

The 75 per cent safe harbour is not the free pass you were told about

Article 18.6 LIS allows the remuneration of a professional shareholder who is an individual to be treated as matching market value if three sets of requirements are met. More than 75 per cent of the company's income must come from professional activities and the company must have adequate material and human resources. The remuneration of all professional shareholders taken together must not fall below 75 per cent of the result before deducting it. And each shareholder's remuneration must be set under written criteria according to their contribution to the company's performance and must not be lower than 1.5 times the average salary of employees with similar duties or, if there are none, five times the IPREM (the public income reference index).

Here is what almost nobody explains. The safe harbour itself requires adequate material and human resources, so a company with no structure, which is exactly the kind the inspectors pursue, cannot rely on it even if it meets the percentage. It also requires written remuneration criteria, which in most small companies either do not exist or are drafted when the inspection arrives. Taking 75 per cent of the result with no resources and no written agreement predating the facts does not put you within the safe harbour.

Nor does it work in reverse: failing article 18.6 LIS does not mean your remuneration is below market value. It is an option for the taxpayer, not a presumption against them, and the value can be defended with any of the methods of article 18.4 LIS, for instance against what a professional in your field earns as an employee. And article 18.3 LIS exempts from the specific related-party documentation where transactions with the same person do not exceed 250,000 euros, but not from valuing at market.

The classification changes the penalty: fraudulent means and the base

Article 191 LGT classifies as serious, with a fine of 50 to 100 per cent, an infringement involving concealment with a base above 3,000 euros, and as very serious, 100 to 150 per cent, one committed through fraudulent means. Article 184.3.c) LGT includes among those means the use of interposed persons or entities where the offender, in order to conceal their identity, has the receipt of income placed in the name of a third party. That is the door through which many proposals turn a professional services company into a fraudulent means.

That door is closed with facts. The rule requires the purpose of concealing identity, and in most professional services companies the shareholder's name appears in the company name, on the invoices and in the contracts, clients know who provides the service and the company declares everything it earns. A transparent, declared structure conceals nobody. Even concealment is arguable where everything invoiced was declared, albeit under another tax, and fault still requires its own reasoning in the penalty decision.

Then there is the base. In June 2023 the Tribunal Supremo held that, where the adjustment is made as a related-party transaction, the base of the shareholder's penalty is the income tax left unpaid, without deducting what the company paid in corporate tax, because there are two separate taxpayers. Where it is made on the ground of simulation, shareholder and company are treated as one and the tax already paid is deducted. The more serious classification can thus yield a lower base: the strategy is worked out in figures before making submissions, not afterwards.

Do not pay twice: the adjustment on the company's side

If the income goes up in your personal tax, it must go down in the company. Article 18 LIS requires the authority to adjust the other related parties as well, and article 19 of the Corporate Income Tax Regulation sets out how: if you appeal, the assessment is notified to the company so that it can join the proceedings and, once final, the company is adjusted by the authority of its own motion in the last tax period whose filing deadline had passed. Without that bilateral adjustment, the same euro is taxed twice.

With simulation the reasoning changes, but the outcome should be equivalent. If the company is a mere appearance, what it paid in corporate tax on that same income cannot be ignored when you are assessed, because the adjustment must be complete, covering what favours the taxpayer as well as what harms them. The shareholder's assessment often arrives in full while the company's correction is left pending, miscalculated or not done at all, and that has to be checked figure by figure.

That is why the defence is run for you and for the company at the same time: the figures must match in both proceedings, the company's correction must be made for the same amount and the company must join your claim. And there is a time-limit effect worth knowing: article 150.1 LGT provides that, if one of the related parties under inspection meets a ground for the extended 27-month period, that period applies to all the proceedings.

Time limits and courts: from the audit report to the Tribunal Superior de Justicia

Against a disagreement report there are fifteen days to make submissions to the assessing body; the report itself cannot be appealed. Once the assessment is notified, article 235.1 LGT gives one month, from the following day, for the claim before the TEAR; the reposición appeal before the same office, if preferred, has the same time limit, and the penalty, which comes in a separate decision, has its own month. If the amount exceeds 150,000 euros, the TEAR's decision can be appealed to the Tribunal Económico-Administrativo Central (TEAC, the central tax tribunal), and the claim may also be lodged directly before it.

Once that route is exhausted, article 46.1 LJCA (the Administrative Jurisdiction Act) allows two months from the day after notification for the contencioso-administrativo appeal, and not before the Tribunal de Instancia: article 10.1.d) LJCA assigns TEAR decisions to the Sala de lo Contencioso-Administrativo of the Tribunal Superior de Justicia, and article 11.1.d) LJCA sends TEAC decisions to the Audiencia Nacional. The prior attempt at an out-of-court dispute resolution method under article 5 of Organic Law 1/2025 belongs to the civil courts: here the mandatory filter is the economic-administrative claim.

All of this happens within the limitation period: four years, under article 66 LGT, from the day after the filing deadline for each year ends. Personal income tax for 2021, whose filing season ended on 30 June 2022, became time-barred in early July 2026 unless something interrupted the period earlier. The inspection has eighteen months as a general rule and, if it exceeds them, its actions do not interrupt the limitation period. In the Basque Country and Navarre their own regional tax rules and their own economic-administrative tribunals apply.

How we run the case, step by step

1. 1

   Reading the opening notice and measuring the time limits

   We identify the taxes and years involved and whether the company is being inspected in parallel. We work out which years remain open under article 66 LGT and which inspection time limit applies, eighteen or twenty-seven months, under article 150.1 LGT.

2. 2

   Rebuilding the company's substance year by year

   Before answering the first request, we gather the evidence of resources, staff, clients and risks for each year under inspection. What existed is documented with its date; what did not exist is not fabricated but explained through the real business model.

3. 3

   Expert valuation of your remuneration

   The firm works with an expert economist who sets the market value of your work using the methods of article 18.4 LIS and checks whether article 18.6 LIS was met. The report is filed before the audit report, so that the inspectors have to rebut it.

4. 4

   Submissions: classification first, figures second

   At the prior hearing and within the fifteen days against the disagreement report, we attack the simulation finding, defend the value of your remuneration, review the deductible expenses taken into account and demand the bilateral adjustment. If the dispute is only about valuation, we consider a settlement report (acta con acuerdo).

5. 5

   Defence in the penalty proceedings

   We deny the fraudulent means of article 184.3.c) LGT because there was no purpose of concealing your identity, we dispute concealment and fault, and we demand the correct base under the Tribunal Supremo doctrine of June 2023. We also check that the penalty file has not lapsed.

6. 6

   Claim before the TEAR and appeal to the Tribunal Superior de Justicia

   One month to challenge the assessment and another to challenge the penalty, requesting suspension: the tax due requires security, while the penalty is suspended automatically on appeal. The company joins the claim. If it is dismissed, two months to appeal to the Sala de lo Contencioso-Administrativo of the Tribunal Superior de Justicia, with the expert evidence.

The law that applies

• Art. 16 LGT. In acts or transactions involving simulation, the taxable event is the one actually carried out by the parties. The simulation is declared in the assessment itself, with purely tax effects, and the adjustment carries late payment interest and, where appropriate, the relevant penalty. BOE-A-2003-23186
• Art. 15 LGT. Defines the conflict in the application of the tax rule: notoriously artificial or improper acts with no relevant legal or economic effects other than the tax saving. It requires a prior favourable report from the advisory committee and assesses under the rule for the usual acts, plus late payment interest. BOE-A-2003-23186
• Art. 18 LIS. Requires transactions between a company and its shareholders holding at least 25 per cent, or its directors, to be valued at market, exempts from specific documentation transactions with the same person not exceeding 250,000 euros, sets the valuation methods and, in paragraph 6, governs the professional shareholder safe harbour: more than 75 per cent professional income, adequate resources, remuneration not below 75 per cent of the prior result, written criteria and minimums of 1.5 times the average salary or five times the IPREM. BOE-A-2014-12328
• Art. 184 LGT. Defines concealment, with an impact above 10 per cent of the penalty base, and lists the fraudulent means, among them the use of interposed persons or entities where the offender, in order to conceal their identity, has the receipt of income placed in the name of a third party. BOE-A-2003-23186
• Art. 191 LGT. Defines the failure to pay the tax due under a self-assessment: minor (50 per cent) if the base does not exceed 3,000 euros or there is no concealment; serious (50 to 100 per cent) if it exceeds that with concealment or, whatever the base, with false or falsified documents; very serious (100 to 150 per cent) with fraudulent means. The base is the amount left unpaid. BOE-A-2003-23186
• Art. 66 LGT. The authority's right to determine the tax debt by assessment, its right to demand payment of assessed and self-assessed debts, and the rights to request and obtain refunds all become time-barred after four years. BOE-A-2003-23186
• Art. 235 LGT. The economic-administrative claim is lodged within one month from the day after notification of the act, by a pleading that may simply ask for it to be registered, addressed to the body that issued the act and filed electronically where the claimant is obliged to do so. BOE-A-2003-23186
• Arts. 10.1.d) y 46.1 LJCA. The Sala de lo Contencioso-Administrativo of the Tribunal Superior de Justicia hears at single instance the decisions of the regional and local economic-administrative tribunals ending the economic-administrative route. The appeal is brought within two months from the day after notification of the express act ending the administrative route, or within six months if the act is implied. BOE-A-1998-16718

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

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