BackThe High Court of Justice of Madrid, in its judgment of March 1, 2023, examines the possible artificial division of the appellant’s economic activity for indications of simulation. However, before addressing the merits of the dispute, the Chamber rules on the extension of the term that has occurred in the inspection process.
Thus, the Chamber recalls that the agreement to extend the term must specifically and concretely justify the reasons that require carrying out inspection actions after the first twelve months have elapsed. A formal or apparent motivation that makes generic reference to the requirements demanded by the rule to extend the term is not sufficient. Therefore, the acts prior, simultaneous and subsequent to said agreement rule out the possibility that the “special complexity” of the inspection justified the extension of the procedure, since no inspection activity was carried out since June 20, 2016. It is clear that the inspection task had already been completed even months earlier.
Consequently, since the extension agreement lacks validity and effectiveness, the inspection actions in question could not have exceeded twelve months in duration. In short, as the inspection actions had lasted more than twelve months, their commencement did not interrupt the statute of limitations period, and therefore the challenged assessment in relation to the 2010 and 2011 corporate income tax years must be annulled.
As regards the declaration of simulation made by the Administration, the Court begins by pointing out that the contested liquidation states that the division of the economic activity between the appellant entity and one of its partners is artificial, and that there is a single economic activity carried out by the company. Furthermore, it is argued that this simulation was aimed at obtaining a tax benefit in the appellant entity by reducing income and increasing expenses, without this action increasing the tax burden of the partner, who pays Personal Income Tax (IRPF) under the objective estimation regime and Value Added Tax (VAT) under the simplified regime.
However, the Chamber points out that the Administration’s position clashes, first of all, with the fact that, by an agreement dated January 22, 2013, notified on the 28th of the same month (more than two years before the inspection procedure in question began), the partner was excluded from the objective estimation regime for Personal Income Tax and the simplified VAT regime for tax years 2009, 2010, 2011 and 2012 for having exceeded the limit of vehicles used in the activity. However, before that, specifically on November 20, 2012, the interested party filed supplementary returns for both personal income tax and VAT, declaring the income from the activity under the simplified direct estimation regime for personal income tax and the general regime for VAT. Therefore, in the 2012 tax year, the partner was taxed in the IRPF declaring all the income from the economic activity under the direct estimation, and not under the objective estimation regime, which contradicts one of the grounds of the liquidation.
In addition to this, the contested liquidation is also based on the non-existence of a real business structure on the part of the partner of the entity. However, the Chamber points out that this statement contradicts other evidence present in the administrative file, which shows that the partner owned several commercial vehicles (three tractor units and three semi-trailers) and was registered as a businesswoman with the General Treasury of the Social Security since 2006, with four employees registered in the general Social Security regime (three full-time and one part-time). It is also proven that numerous transports were carried out with the aforementioned vehicles and that the partner issued invoices to her clients for these trips.
Finally, the Court clarifies that the existence of (related) transactions between the appellant entity and its natural person partner could give rise, if applicable, to a correct valuation of the same if they had not been evaluated at market prices, or to the consideration of other types of income as a result of payments or deliveries of money between both parties, but this does not prove at all that the economic activity was carried out exclusively by the company. Based on the above reasons, the challenged assessment is annulled in relation to tax year 2012 as being contrary to the law, which implies the total annulment of the assessment, which had already been annulled due to statute of limitations in respect of tax years 2010 and 2011. In addition, the annulment of the liquidation also entails the annulment of the agreement imposing the penalty for lack of legal basis.
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