New provisions on related-party transactions in the new Corporate Income Tax Law
Last November 28 saw the publication in the Official State Gazette of the new Corporate Income Tax Law (27/2014) (LIS), introducing important changes in that tax regime and in particular regarding related-party transactions (new article 18).
The main changes made in the transfer pricing area include most notably those relating to the documentation obligations. Specifically, the new LIS: (i) extends, with exceptions, the possibility of applying the simplified system where the net revenues are €45 million or less; (ii) eliminates the obligation for certain types of transactions; and (iii) reduces the amount of penalties applicable in this area.
This simplification aim is also seen in the elimination of certain cases of relatedness in force up to now (those relating to an entity and the shareholders of another entity where both belonged to the same group, or the remuneration paid to shareholders or directors for the performance of their functions) and in the increase of shareholding percentages in order for a shareholder and its company to be deemed related (from 1%-5% to 25%).
Regarding the valuation of related-party transactions, the new Law eliminates the hierarchy of methods, secondarily accepts other valuation techniques that comply with the arm’s length principle, and slightly modifies the valuation rules in transactions performed by partners with professional firms.
The Law also adopts the separation of the valuation made according to its rules from that made in other areas, such as, for example, the customs value.
Important changes are also made in relation to permanent establishments (determination of the tax base derived from “internal transactions” between them and their head office), in the rules regulating advance pricing agreements on related-party transactions (their effects extend retroactively to all open fiscal years) and with regard to the secondary adjustment (possibility of not applying it if the value difference is restored).
The subarticles of the Law relating to the procedure for verification of the fair market value are maintained without substantial amendments (although the expert appraisal requirement is eliminated and the tax authorities are authorized to make adjustments of all kinds, not only to the value), as are those referring to certain categories of transactions (intragroup services, cost apportionment arrangements), probably until the subsequent implementations of the BEPS Action Plan take effect internationally.
Lastly, the impact which the BEPS work might end up having on other matters affecting related-party transactions has yet to be determined, particularly in relation to the “country by country report”.
Garrigues Tax Department
