A few weeks ago we commented on the deductibility of the so-called intra-group services for corporate income tax purposes and the requirements established in article 18.5 of the Corporate Income Tax Act, with special mention of the requirement that the services rendered must produce or be likely to produce an advantage or profit for the recipient. We concluded that, if proving the reality of the service rendered can be difficult in certain categories, proving that an advantage or utility has been produced for the taxpayer can already be a mammoth effort.
The purpose of the article was simply to draw attention to the risk involved in deducting, for corporate income tax purposes, expenses invoiced by a related party for the provision of services. We often find that these invoices refer to ambiguous and indeterminate concepts, such as storage services, transport during the year, administrative expenses, etc., without further explanation or documentation to justify the reality of these services or the benefit or usefulness to the taxpayer who intends to deduct them. In this regard, in most cases the provisions of the current Invoicing Regulation are not even respected, in terms of the description of the transactions, the inclusion of all the data necessary to determine the VAT taxable base, or the unit price of such transactions.
Spanish courts usually consider the non-deductibility of these services because neither the actual existence of the service nor the benefit to the company that supposedly receives it has been demonstrated, and therefore the charge is not admitted as deductible, based on the principle of correlation of income and expenses.
Although the subject matter is very extensive and cannot be covered in this article, we would like to give a few brief details on those points that may help to understand how to prove that the recipient of the services has obtained an advantage or profit from these intra-group services.
According to the OECD Guidelines, the first point to take into account is the need for there to be an economic or commercial interest for the entity receiving the service. This requirement is deemed to be fulfilled when an independent company in comparable circumstances would have demanded such a service, either from an external company or by developing it itself. Moreover, it should not be a duplicate service, unless this happens only on a temporary or ad hoc basis or where the service is duplicated in order to avoid making unwise decisions. As regards payment, consideration should be given to the usual method of payment between independent companies. It should also be borne in mind that the existence of a payment between group companies does not determine that an intra-group service actually exists and similarly, the non-existence of a payment does not mean that it does not exist.
All of the above is nothing more than a simple outline of this matter, and as indicated at the beginning, the sole purpose is to draw attention to the tax risks involved in this type of expense, as well as to give a few hints on how to demonstrate the reality and usefulness of the same at the recipient's headquarters.
At Confialia, thanks to our process management and our investment in technology, we are prepared to detect these types of operations and to generate all the supporting documentation for them in a preventive manner, so that, when the time comes, their justification is as accurate as possible.
