For nearly two decades, the Spanish Tax Administration (AEAT) has been targeting professionals seeking to unlawfully reduce their tax burden through the use of special purpose entities.
The primary aim of these schemes was to artificially channel professional income to benefit from the 25% Corporate Income Tax rate instead of the higher Personal Income Tax rate, which, depending on the Autonomous Region, ranges between 45% and 52%.
Consequently, the tax authorities have been scrutinizing arrangements where the company lacks genuine business involvement due to insufficient material or human resources (i.e., a simulation), as well as instances involving deductions for personal expenses or the use of corporate assets without proper contractual justification. It is important to highlight that the services in question are typically of a highly personal nature – intuitu personae – meaning the shareholder’s direct involvement is indispensable. Examples include audits targeting professionals such as artists, journalists, lawyers, architects, and others.
While these situations must be assessed individually, we generally align with the AEAT’s approach, which has often been upheld by case law. However, we would like to point out a concerning trend: the tax authorities are now also investigating companies engaged in commercial activities – not solely consultants or service providers – even in cases where the company operates with just one employee. This means that commercial businesses (e.g., agencies, representatives, commission agents, e-commerce operators) where the shareholder plays a key role are increasingly coming under scrutiny. Likewise, sole proprietorships – regardless of their line of work – where the partner is the sole individual carrying out the activity are also being investigated.
We view this new stance by the Inspectorate, which we are observing firsthand, as deeply concerning. It risks limiting entrepreneurs’ ability to choose an organizational structure that best suits their operational needs. Subjecting sole proprietorships and small businesses to the same tax scrutiny and criteria as larger corporations could place them at an unfair disadvantage, reducing their flexibility and hampering their competitiveness. In the long run, this approach could discourage entrepreneurship and innovation.
It is therefore highly advisable for sole proprietorships and single-employee companies to review their corporate structures. In the event of a tax audit, the shareholder could face taxation on the entirety of the company’s income, as well as significant penalties.
Given the complexity of these matters, it is essential to seek professional legal and tax advice to ensure compliance and mitigate risks. At Lullius Partners, we are at your disposal to thoroughly review these corporate structures and provide tailored solutions to safeguard your interests.
