Interposed Companies: Spain’s Supreme Court Limits the Basis for Tax Penalties

A significant proportion of Spanish professionals carry out their business activities through a company. Doctors, lawyers, consultants, engineers, IT professionals and creatives often invoice their clients through a company of which they are both shareholders and directors. This is a legitimate and widely used business structure. The issue arises when the Spanish Tax Agency considers that the company lacks genuine economic substance and classifies it as an interposed company or a sham entity. In such cases, the income reported by the company is reallocated directly to the individual, the corresponding Personal Income Tax (IRPF) is assessed, and a tax penalty is imposed.

For years, the key legal question has not been whether a penalty may be imposed, but rather how the amount of that penalty should be calculated. This is where Judgment No. 400/2026 of 30 March, delivered by the Administrative Chamber of the Spanish Supreme Court (Appeal No. 8721/2023), reaffirms a principle of considerable practical importance for professionals operating under this type of structure.

The dispute arose from the reassessment of the Personal Income Tax (IRPF) returns of two taxpayers for the 2013 to 2016 tax years. The Tax Inspection concluded that a company used by the taxpayers did not carry out a genuine economic activity and functioned merely as an interposed entity through which strictly personal income was channelled. The consequences followed the familiar pattern: the income declared by the company was attributed directly to the individual shareholders, the corresponding IRPF liabilities were assessed, and penalties were imposed for an infringement of Article 191 of the Spanish General Tax Act (Ley General Tributaria), namely, the failure to pay tax due.

The case subsequently reached the High Court of Justice of Catalonia, which upheld both the tax reassessment and the penalties. The taxpayers then filed an appeal before the Spanish Supreme Court, whose ruling now gives the case particular relevance for taxpayers and tax advisers, especially within the Catalan jurisdiction.

The central issue before the Court was the calculation of the penalty under Article 191 of the General Tax Act in cases involving simulated arrangements through interposed companies.

Two possible interpretations existed. The first was to calculate the penalty on the entire amount of Personal Income Tax underpaid after reallocating the company’s income to the individual. The second was to calculate the penalty on that same amount reduced by the tax already paid by the company on those very same profits, primarily through Corporate Income Tax.

The difference between these two approaches is substantial. Where a company has already paid tax on income that is subsequently attributed to its shareholder, calculating the penalty on the full amount of the individual’s tax liability—without deducting the tax already paid—would result in a penalty based on an amount greater than the actual economic loss suffered by the Treasury.

The Supreme Court relied on principles it had already established in earlier decisions, particularly Judgments No. 770/2023 of 8 June and No. 336/2024 of 28 February. The Court’s position is unequivocal: the basis for the penalty must reflect the actual economic loss caused to the Public Treasury.

Accordingly, where the interposed company has already paid tax on income that is later attributed to the individual shareholder, those amounts must, as a general rule, reduce the basis on which the penalty is calculated.

The Court reasoned that disregarding those payments would lead to a disproportionate penalty, since it would punish an amount exceeding the actual financial damage caused to the Treasury. As a result, the penalties were set aside insofar as they had been incorrectly calculated, while the Court reaffirmed that the penalty must be based on the difference between the tax unpaid by the individual and the tax already paid by the company in respect of the same income.

It should be noted, however, that this mitigating rule applies primarily where the Tax Administration has not carried out a double tax adjustment in relation to the same income. Consequently, its practical application will always depend on the way in which the tax reassessment has been structured in each individual case.

The significance of the judgment should not be overstated. The Supreme Court does not endorse the use of companies lacking genuine economic substance, nor does it question the Tax Administration’s authority to reassess tax liabilities and impose penalties where it finds that a simulated arrangement exists.

What the Court does is require that the calculation of the penalty comply with the principles of proportionality, comprehensive tax regularisation and good administration, ensuring that the penalty reflects the actual tax loss suffered by the Treasury.

In other words, the existence of a simulated arrangement is one issue; the calculation of the resulting penalty is another, and it must respect those legal limits.

The practical implications are significant. Tax audits involving professional service companies remain an area of constant scrutiny by the Spanish Tax Administration, and the penalties involved can be substantial.

This judgment provides important support for taxpayers facing penalty proceedings arising from the use of interposed companies and requires the Tax Administration to calculate penalties by reference to the actual economic loss rather than an artificially inflated figure.

That said, the judgment must be understood correctly. It concerns the calculation of the penalty, not the validity of the underlying tax reassessment.

The best protection against this type of tax exposure is not to rely on a possible reduction of penalties, but to ensure that the company carries on a genuine economic activity, has its own personnel and business resources, and that transactions with its shareholders comply with arm’s-length principles. Preventive tax planning remains, by far, the safest approach.

Judgment No. 400/2026 confirms that, in cases involving simulated arrangements through interposed companies, tax penalties must be calculated on the basis of the actual tax loss suffered by the Public Treasury rather than on artificially inflated amounts.

This is welcome news from the perspective of legal certainty. At the same time, it serves as a reminder that the Spanish Tax Administration continues to pay close attention to these corporate structures.

At ILIA ETL GLOBAL, we advise professionals and businesses on the design and review of their corporate structures to ensure they reflect genuine economic activity and can withstand tax scrutiny. We also represent clients in ongoing tax audits and penalty proceedings. If you operate through a company and would like to assess your current structure with confidence and legal certainty, our tax team will be pleased to assist you.

Article prepared by our colleague Xavier Vilalta.

To receive specialized advice on this matter, you may contact specialists at ILIA ETL GLOBAL, or alternatively reach out through our contact form.