Spain’s National Court challenges the deductibility of intragroup services in the absence of a written contract

By Pilar Barriguete, Director, and Victoria Arozamena, Senior Associate, Kroll Advisory, S.L., Madrid

In recent years, the Spanish tax administration and Spanish courts have had a clear tendency to challenge the provision of intragroup services, denying its corporate income tax deductibility and increasing the tax burden for taxpayers carrying out these transactions in Spain.

In this regard, the Spanish National Court did not consider the provision of services to be sufficiently proven in its January 25 judgment because, among other reasons, the taxpayer had not provided a contract. This judgment reflects the understanding that the Spanish National Court is adopting a more restrictive position than in previous case law regarding the required proof to support the deductibility of intragroup services.

Background

In this context, we highlight the recent judgment of the Spanish National Court (Judgment No. 5537/2021), published on January 25, which did not consider the provision of services to be accredited in the absence of a written contract produced by the company as evidence of the intended commercial and financial relationships between parties. This assumes an even more restrictive line with respect to the statements previously reviewed for the proof needed to be able to support the deductibility of intragroup services.

The judges ruled on a contentious administrative appeal that was filed before a resolution of the Spanish Central Economic-Administrative Tribunal on December 4, 2018 (R.G.: 5908/17). It was regarding a corporate tax inspection procedure initiated in 2012, for the fiscal years 2008 and 2009, of a Spanish entity (taxpayer) that belongs to a multinational group managing shopping centers. The taxpayer received intragroup services from its related party resident in Portugal, consisting of strategic business management and marketing services related to market research.

One of the critical points of the judgment—which we will examine in more detail—is the court’s decision to deny deductibility of the expenses corresponding to the fees for the strategic management services provided to the Spanish entity by its Portuguese-related party because there was not enough proof of their actual provision, as the intragroup contract was not provided (without analyzing other factors, such as the benefit or usefulness to the recipient).

Denying the deductibility of services from insufficient proof

As noted previously, the position of the Spanish tax authorites and courts was to deny the deductibility of services on the grounds of insufficient proof provided by the taxpayer. In the present case, the Spanish National Court’s main argument to challenge the actual provision of services was that a supporting intragroup agreement had not been provided. Therefore, the court struggled to understand the content and scope of the services offered and considered that the remaining evidence the taxpayer supplied was insufficient to make up for the lack of a contract.

The taxpayer claimed to have lost the contract and instead provided an explanatory document by an independent expert with a detailed description of the specific services rendered. However, the court did not attribute sufficient evidentiary value to this document.

The Spanish National Court challenged all the supporting evidence the taxpayer provided in this judgment. First, the court considered that the invoices provided were too generic. Furthermore, the description of services in the invoices also referred to the contract, which, as stated previously, was not provided (i.e., the invoice indicated “Services Provided According to Contract January 2008” for each month). Second, the court considered that the internal correspondence provided as proof of services rendered (although its authenticity and integrity are accredited in the expert report provided) would only support the existence of habitual and ordinary relationships in the commercial field between the staff of the Spanish and Portuguese entities, without inferring from those emails an actual provision of intragroup services. Finally, the court didn’t find sufficient evidentiary value in the taxpayer’s argument of the existence of a reference to the contracts in question in its annual report.

Based on the above arguments, the Spanish National Court confirmed the resolution of the tax administration ruling that the requirements set out in the Spanish legislation to support the deductibility of the services (i.e., actual provision, benefit, and usefulness to the recipient) had not been met.

Implications and conclusions                  

Throughout the OECD transfer pricing guidelines, we find numerous references to the need for supporting documentation of intercompany transactions and the importance of an analysis of the conduct of the parties, especially in its absence.

Paragraph 1.49 of the guidelines states, “Where no written terms exist, the actual transaction would need to be deduced from the evidence of actual conduct provided by identifying the economically relevant characteristics of the transaction (…)”. The following paragraph supplements this statement adding, “Where the transaction has not been formalized, all aspects would need to be deduced from available evidence of the conduct of the parties, including what functions are actually performed, what assets are actually used, and what risks are actually assumed by each of the parties.”

Not only do the OECD transfer pricing guidelines mention the possibility that there may be an intercompany provision of services even if they have not been agreed to by contract, but paragraph 1.50 even includes an example of this circumstance. It indicates that in these cases, “The analysis would need to determine the nature of those commercial or financial relations from the economically relevant characteristics in order to determine the terms and conditions of the identified transaction.”

Furthermore, although Chapter VI, paragraph 6.35 considers contractual agreements as the starting point for any transfer pricing analysis of transactions involving intangible assets, in paragraph 6.36, we see again a reference to the importance of the analysis of the conduct of the parties when correctly delineating the related transaction, complementary to the written contract: “Where no written terms exist, or where the facts of the case, including the conduct of the parties, differ from the written terms of any agreement between them or supplement these written terms, the actual transaction must be deduced from the facts as established, including the conduct of the parties.”

But paragraph 7.18 is perhaps the most representative concerning the treatment that must be given in the absence of supporting evidence such as contracts: “(…) the absence of payments or contractual agreements does not automatically lead to the conclusion that no intra-group services have been rendered.”

In essence, the concept of a “written contract” in the OECD guidelines has been understood and interpreted as a broad concept—not limited to a formal contract, but inclusive of any terms concerning intercompany transactions, such as written communications in the form of emails or other commercial documents that shed light on the intended nature of the commercial relationship between the parties. The judgment analyzed here confirms that the tax administration is restricting the interpretation of that relatively broad definition of the OECD guidelines to formal written contracts.

Based on an analysis of the position of the Spanish National Court in this judgment, it can be concluded that going forward the burden of proof to support the provision of intragroup services has to be higher than before, including more complete and descriptive documentation evidence, such as a written contract.

In this regard, we emphasize the importance of having adequate transfer pricing documentation, which includes a thorough comparability analysis that could support the actual provision and usefulness of the services between related parties, as well as intragroup contracts that clearly and exhaustively define the services and the distribution of responsibilities and risks between the parties. As noted above, these are being considered, based on the Spanish courts’ position, as the critical evidence to support the deductibility of intragroup services.

• Pilar Barriguete is a director and Victoria Arozamena is a senior associate with Kroll Advisory, S.L. in Madrid.