The formal introduction of transfer pricing (TP) regulations into Spanish legislation began in 2006 with the approval of Law 36/2006, and since then numerous changes have been adopted. During these years the TP’s importance grew, and as well the role of the Spanish Tax Authority –Agencia Estatal de Administración Tributaria (AEAT) became relevant in terms of TP administration and audits countrywide.
Currently, the transfer pricing rules in Spain are governed by the Corporate Income Tax Act (CIT Act, and Corporate Income Tax Regulations (CIT Regulations). The Spanish TP rules largely follow the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (The OECD TP guidelines).
Arm’s Length Principle
The arm’s length principle, as stipulated in Article 9 of the OECD Model Treaty, was included in Spanish law through Article 18.1 of the CIT Act. This article specifies that transactions between related persons or entities must be valued at market value, which is the price independent parties would agree upon under free market conditions.
Related Party Definition
Under Article 18.1 of Corporate Income Tax, related parties in transfer pricing refer to persons or entities that have a specific relationship influencing their transactions, such as ownership, control, or significant influence. Entities are considered related in various cases, including:
- A company and its shareholders (if ownership is 25% or more).
- A company and its directors or administrators, except for standard compensation.
- A company and close family members (up to the third degree) of shareholders or directors.
- Entities belonging to the same corporate group under Spanish Commercial Code Article 42.
- A company and another entity it directly or indirectly owns at least 25% of.
Two companies with shared ownership of at least 25% by the same individuals or their close relatives.
A Spanish company and its foreign permanent establishments.
Transfer Pricing Methods
The methods that can be used to determine the arm’s length price in Spain are:
- Comparable Uncontrolled Price Method
- Resale Price Method
- Cost Plus Method
- Transactional Net Margin Method
- Profit Split Method
The transfer pricing rules in Spain do not differentiate between the methods nor provide a hierarchy; instead, the selection of the method is based on the most appropriate principle. In addition, the legislator allows for the selection of another method if none of the above does not work best, as long as it complies with the arm’s length principle.
Comparability Analysis
An important part of the transfer pricing compliance is the comparability analysis. Below is a summary of the main points regarding comparability analysis in Spain:
In practice, Spain follows the OECD Transfer Pricing Guidelines (OECD TPG) and applies the comparability analysis outlined in Chapter III. This means Spain’s tax authorities focus on determining the fair market value in related-party transactions, these transactions are compared to similar ones between independent parties. This comparison considers factors like the nature of goods or services, functions and risks assumed by each party, contractual terms, economic conditions, and business strategies. If multiple transactions are closely linked or continuous, they are analyzed as a whole. Transactions are deemed comparable when there are no major differences affecting price or profit margins, or when adjustments can be made to eliminate such differences. Spain’s legislator does not allow for the usage of secret comparables; neither does it state a preference between internal and external comparables, but there are circumstances when the internal ones are deemed necessary.
Documentation Requirements
Documentation requirements for transfer prices in Spain are based on the three-layer method of OECD. That means multinationals have to report the following to the French tax authorities:
- Master file;
- Local file; and
- Country-by-Country (CbC) report.
The master and local documentation requirements apply to both domestic as well as international entities, engaged in related-party transactions. However, simplified documentation requirements are provided to entities with a net turnover of less than €45 million, except for specific transactions such as business transfers, transfers of unlisted securities or securities in tax havens, real estate transactions, and transactions involving intangible assets. Certain transactions are exempt from documentation requirements, including those between entities in the same fiscal consolidation group, transactions within Economic Interest Groups or temporary joint ventures (unless subject to special tax regimes), transactions under public offers for sale or acquisition of securities, and transactions with a related entity when the total consideration does not exceed €250,000.
Country-by-Country Reporting
- Country-by-country (CbC) reports are submitted with the requirement for the big multi-national companies (annual turnover €750 Million) to disclose the country finances of the companies. This includes revenues, profits, taxes paid, employees, and assets.
- The CbC report must be submitted to the tax authorities within 12 months after the fiscal year ends. For example, if the tax year ends on December 31, 2023, the report must be filed by December 31, 2024.
- Spain is adhering to OECD and EU standards, which allow us to ensure a transparent system that prevents tax fraud.
Advance Pricing Agreements (APA) and Mutual Agreement Program (MAP)
Spain uses both APA and MAP to manage and resolve international tax disputes, in compliance with OECD guidelines and EU directives.
The Spain law provides three types of APAs – Unilateral, Bilateral, and Multilateral:
Unilateral APA: A unilateral Advance Pricing Agreement (APA) is a so-called agreement between a Spanish taxpayer and the tax administration on transfer pricing conditions before related-party transactions take place. It guarantees that the price adheres to the arm’s length principle and avoids tax disputes in the future. The Tax and Financial Inspection Department of the AEAT processes APAs, and these apply to a well-defined process of pre-filing, application, review, and solution. An APA is valid for a maximum of 4 years after approval and can be renewed or extended depending on shifts in economic conditions.
A bilateral or multilateral Advance Pricing Agreement (APA) is a bilateral or multilateral arrangement between a Spanish taxpayer AEAT and one or more foreign tax administrations to discuss transfer pricing rules concerning cross-border related-party transactions. It is based on the same flow as a unilateral APA but, by implication, includes statutory involvement among several tax administrations. The AEAT should assess and approve the request, and the taxpayer should submit all relevant information and take part in the deliberations. There must be the finalization of the agreement when all tax administrations are involved and the taxpayer agrees to its terms.
Spain has many international tax treaties, and businesses can use the Mutual Agreement Procedure (MAP) to resolve disputes, but MAP cases usually take over three years. Unlike in other countries, Spain doesn’t charge for APA or MAP, but it may reject cases if they aren’t complex enough. If no agreement is reached, arbitration is possible, especially through the EU Arbitration Convention or OECD Multilateral Instrument, which helps avoid double taxation when both countries agree.
Approach to Transfer Pricing Audits
Audits can begin ex officio or at the taxpayer’s request, and AEAT must inform taxpayers of their rights, obligations, and scope of the audit. During the process, AEAT may request any necessary information to assess compliance and, if adjustments are needed, taxpayers are entitled to a hearing before a final decision. Audits typically last 18 months, extendable to 27 months for large taxpayers. Upon completion, the AEAT issues one of three tax assessments: in conformity (agreed findings), in agreement (negotiated adjustments), or in disagreement (disputed results). Tax must be paid within 20 days of notification, though deferrals or installments may be requested, subject to conditions. Precautionary measures may be applied if AEAT doubts tax collection, with the taxpayer having five days to contest them.
Penalties
Non-compliance with documentation rules for related-party transactions may lead to serious consequences. In case of the absence of required documentation or the then-submitted false or incomplete information, a serious tax offense penalty may be incurred by the tax authorities. The penalty for non-compliance should include a flat rate of 1,000 for each missing or false piece of information and 10,000 for each missing or false set of information. The maximum fine is limited to the lesser amount between 10% of the total volume of the transactions in the tax year or 1% of the net turnover. Where the market value obtained from the documentation does not align with that reported in the tax declarations, the tax administrations can apply a consequent proportionate fine equal to 15% of the amount corrected to the transaction values. Moreover, these sanctions are in addition to those arising from other tax fraud, e.g., obstruction or resistance to cooperation with the tax administration.
Taxation at a Glance
Spain’s tax system consists of direct, indirect, and local taxes, as regulated by the Constitution and the General Tax Law. Corporate, personal, and nonresident income taxes are subject to different laws, although there are similar legislations for the Basque Country and Navarra. The Spanish Tax Administration (STA) is responsible for tax enforcement and collection. CIT and PIT apply nationally, with regional variations. Corporations are taxed on all sources of income and all other forms of income with some of the deductions and exemptions, respectively.
The official name of the Spanish tax authority is the Agencia Estatal de Administración Tributaria.
The table below provides a summary of the main taxation rates related to businesses:
Tax Type | Tax Rate |
Corporate Tax | 25% |
VAT | 21% |
Withholding tax on dividends to non-residents | 19% |
Withholding tax on interest to non-residents | 19% |
Withholding tax on royalties to non-residents | 24% |
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