Everything you need to know about shell companies. In the world of professionals and freelancers, the idea of invoicing services through a company is attractive. The main reason is the difference between the corporate tax rate (generally lower) and the personal income tax rate, which can be significantly higher.
However, what at first glance seems like a tax planning strategy can become a serious problem if the tax authorities interpret it as an intermediary company.
What does the Tax Office consider an intermediary company?
According to the Spanish Tax Agency, an interposed company is a legal structure used by a professional (lawyer, architect, consultant, etc.) to channel their income for the sole purpose of avoiding high personal income tax.
In essence, it is a simulation, where the individual is still the one performing the activity, but the company is used as a simple intermediary or "screen".
The focus of the inspection
The focus of the inspection is not on the company's existence, but on its lack of economic substance. The key is to determine whether the company has its own substantial business activity, or if it is simply a vehicle for reducing personal tax burdens.
Warning signs that trigger an inspection
The tax authorities have developed a keen eye for detecting these situations. The main factors that raise suspicion are:
- Lack of material and human resources: the company lacks a real infrastructure. It has no office of its own (or it is the professional's home), no employees beyond the partner/professional, and its team is minimal.
- The professional is the only asset: the business depends exclusively on the partner's personal skills. If the professional were to disappear, the company could not continue operating.
- Non-existent risk: the company does not assume the typical business risks of an activity, such as investments, significant operating expenses or commercial risks.
- Direct link between the professional and the client: clients contract and interact directly with the professional, not with the company. The service contract, if any, is with the professional, not with the company.
The serious consequences of being discovered
If the tax agency's inspection concludes that your company is a shell company, the consequences can be very severe:
Rent reclassification
The income invoiced by the company is directly attributed to the partner-professional. This means that the Tax Agency will require payment of the corresponding Personal Income Tax (IRPF), applying the tax rates that would have been applicable if the activity had been carried out as a self-employed individual.
Settlement of interest and penalties
The principal debt (the unpaid income tax) will be increased by late payment interest and a financial penalty that can range from 50% to 150% of the defrauded amount, depending on the severity.
Loss of tax advantages
The company may lose the right to apply certain deductions or to be taxed under Corporation Tax.
How to defend ourselves? By creating a society with “substance”
To avoid being classified as a shell company, the key is to demonstrate that your company has a real and distinct activity from the individual.
Some crucial measures are:
- Adding value: the company must offer more than just the professional's skills. For example, it could have a team of employees providing support, manage the client portfolio collectively, or develop valuable products and services.
- Having your own resources: it is essential that the company has its own registered office and workplace (not the professional's home), equipment and hired staff.
- Taking business risks: demonstrate that your company makes investments, incurs personnel and advertising expenses, or even experiences losses in its accounts. This shows that it operates independently in the market.
- Formalize relationships: the company must have contracts with clients, and the professional must have an employment or commercial contract with the company itself, which justifies the receipt of a salary or services.
Conclusion regarding intermediary companies
Ultimately, tax audits don't aim to punish those who own a company, but rather those who misuse it. The difference between proper tax planning and a sham transaction lies in the substance and legitimacy of the business.
Consulting with tax experts is always the best way to ensure your business structure is robust and compliant with regulations.
Contact our tax lawyers in Mallorca
At Resitax, we help you prevent tax penalties and design secure business structures. Request a free consultation with our tax law experts in Mallorca and ensure the peace of mind of your business.