Tax Controversy 2024 Comparisons

In general, tax disputes are usually initiated in the following two ways:

• by the Spanish Tax Agency (STA), following the initiation of a limited audit procedure or tax inspection to the taxpayer; or
• by the taxpayer, after challenging:
1. their own self-assessments through an application for rectification of self-assessment and refund of undue payments; and/or
2. those withholdings (in direct taxation) and/or tax payments charged (in indirect taxation) that they consider to be incorrectly made by filing a claim against them with the STA.

However, the first route (challenging self-assessments) has been slightly modified as a result of a new tax procedure introduced in 2023, which came into effect in 2024. This new procedure – the “rectifying self-assessment” – establishes a single correction system to rectify, complete or modify previous self-assessments, regardless of the result thereof, and without the need to wait for an administrative resolution. Therefore, with this new procedure, the original self-assessment will be replaced (either by rectifying, supplementing or modifying it). However, an exception to this new single correction system is made in cases, among others, in which the rectification is based on the violation of a higher legal standard, namely the Spanish Constitution, European Union Law or an International Treaty or Convention, in which case the traditional self-assessment rectification procedure may be initiated through a rectification claim form.

In general, the taxes that give rise to more tax controversies are corporate income tax (CIT), personal income tax (PIT) and VAT.

Nevertheless, we cannot overlook the high level of tax controversy that has arisen in recent years regarding the tax on the increase in value of urban land (TIVUL or municipal capital gains tax) and the new temporary solidarity tax of large fortunes (TSTLF).

The primary tax controversies concerning CIT, PIT, and VAT include:

• offsetting or applying losses and deductions from previous years;
• economic interest groupings channelling deductions or other tax benefits, often deviating from the law, showing signs of abuse, relying on fabricated factual assumptions, or artificially inflating tax credits to distort the purpose of the tax benefit;
• assessing the validity of economic reasons underpinning restructuring operations, particularly in relation to tax deferral regimes;
• transfer pricing issues in related-party transactions;
• application of controlled foreign companies regime (CFC rules);
• tax deductibility of expenses incurred in the economic activity itself (ie, the transfer of mixed-use vehicles to employees or the remuneration of shareholders and directors);
• use of companies to provide professional services with the main purpose of channelling income, or unduly diverting personal expenses of individuals, in such a way that the applicable tax rates are improperly reduced;
• “fictitious” changes in tax residence;
• improper application of the special tax regime for inpatriates;
• virtual currency transactions;
• use of legal entities for the purpose of accessing the right to deduct input VAT when they are directly or indirectly related to other entities whose activities do not generate such right; and
• the tax regime of real estate transactions.

Tax controversies can be mitigated and/or avoided through some of the following instruments or strategies:

• A binding consultation can be filed with the General Tax Office (GTO) when there is no clear interpretative criteria on the transactions/operations that are intended to be carried out.
• A defense file can be prepared to justify before a potential tax audit by the STA the reality, existence and reasons for a specific legal operation/transaction.
• Structured processes can be implemented aimed at the systematic identification, evaluation, classification and treatment of risks in order to ensure due compliance with all tax obligations in accordance with the applicable tax regulations and the existing doctrine and precedents in this regard.
• In the field of transfer pricing, advance pricing agreements (APAs) can be concluded in order to guarantee certain taxable bases for future taxation and to grant the companies involved in the transfer and provide the companies involved with certainty as to the tax treatment of their transactions, thereby avoiding future tax audits.

Spain, as one of the most proactive countries in implementing the measures proposed in the OECD’s Base Erosion and Profit Shifting (BEPS) Project and transposing the EU Anti-Tax Avoidance (ATAD) and Disclosure and Exchange of Information Directives (DAC), has already adopted the latest measures to combat tax evasion, including:

• Directive 2016/1164 as amended by Directive 2017/952 (ATAD I and ATAD II) on hybrid mismatches;
• Council Directive (EU) 2021/514 of 22 March 2021 (DAC 7), under which digital platform operators, whether or not resident in the EU, have new obligations to report revenues earned by users of their platforms, and a new concept of advanced administrative co-operation, known as “joint tax audits”, has been introduced; and
• ratification of the Multilateral Convention to implement measures related to tax treaties to prevent base erosion and profit shifting (MLI).

In the near term, further measures are expected as several directives are currently under parliamentary review, with some already partially transposed:

• Council Directive (EU) 2023/2226 of 17 October 2023 (DAC 8), introducing new reporting and due diligence obligations on crypto-asset service providers and consequent automatic exchange of information on crypto-asset transactions, whose antecedent is found in the OECD’s Crypto-Asset Reporting Framework; and
• Council Directive (EU) 2022/2523 of 15 December 2022 on ensuring an overall minimum level of taxation for multinational groups and large domestic groups in the Union.

Likewise, the STA has been taking a proactive stance by implementing, indirectly and ahead of time, the Proposal for a Council Directive laying down rules to prevent the abuse of shell companies for tax purposes and amending Directive 2011/16/EU (ATAD III) through the publication of reports of the Advisory Committee on conflicts in applying the rule provided for in the Spanish General Tax Law (national GAAR).

In accordance with the tax legislation in force, taxpayers may file the following appeals against a tax assessment, or a resolution of a self-assessment rectification procedure initiated by the taxpayer:

• an optional appeal for reconsideration before the same body that issued the act (recurso de reposición); or
• an economic-administrative claim before the Economic-Administrative Courts (regional or central, depending on the amount and/or the administration body issuing the act) against such acts or against the decisions taken in response to such appeals for reconsideration; if these appeals are totally or partially dismissed by the administrative authorities, taxpayers have the right to challenge such decisions before the judicial courts.

It is important to note that the filing of an appeal with an administrative court does not stop the collection of the challenged tax liability, since it becomes enforceable as soon as it is issued by the Tax Administration. However, the taxpayer may choose between paying the challenged tax or suspending its enforcement, this choice being independent of any rights retained in connection with the appeal or claim filed.

In the case of opting for the tax debt suspension, it must be determined whether it derives from a tax assessment or from a sanctioning proceeding. In the case of a tax penalty, the filing of the appeal/complaint automatically implies the suspension of its enforcement in administrative and economic-administrative proceedings, without requiring the provision of any guarantee. However, this suspension is not automatic if the appeal is filed before a judicial court after the preliminary proceedings have been completed.

On the other hand, when the debt arises from a tax assessment, the filing of an appeal does not automatically suspend its enforcement in administrative and economic-administrative proceedings. In such cases, since suspension without a guarantee is less frequent, taxpayers must provide a guarantee if they wish to suspend enforcement of the debt. If the taxpayer chooses not to pay the challenged tax or request its suspension, the STA may initiate an enforcement procedure for the collection of the corresponding amount, which is independent of the appeal or claim filed.

The STA is responsible for the effective application of the state tax and customs system, playing an important role in contributing to the state’s accounts consolidation and obtaining the necessary resources to finance public services. For this purpose, each year, the STA publishes strategic lines of action to combat conduct that it considers may give rise to breaches, fraud and/or tax evasion.

Within these lines of action to check and investigate breaches and/or tax fraud there are the following taxpayer profiles.

Multinational Groups, Large Companies and Tax Groups

In respect of this group of taxpayers, the STA pays particular attention to the following:

• unrecognised or undervalued services rendered;
• existence of tax losses to be offset and deductions from the tax liability pending application;
• erosion of taxable bases caused by the establishment of structures abroad in which profits that should be taxed in Spain are retained;
• payment of dividends, interest and royalties to non-residents without a permanent establishment in Spain; and
• carrying out business restructuring transactions that benefit from a tax deferral.

Great Wealth and Family Groups

In respect of this group of taxpayers, the STA pays particular attention to the following:

• “fictitious” changes in the tax residence (international and between Autonomous Communities internally) of individuals;
• the “actual residence” of foreign companies that belong to a family group;
• the use of opaque companies that hold, directly or indirectly, high-level residential real estate assets located in Spanish territory;
• the holding of assets through, inter alia, foundations and trusts; and
• attempts to falsely assign luxury goods (homes, second homes, aircraft, ships, high-end automobiles) or luxury-related services as part of economic activities by legal entities whose actual business is unrelated to leasing or using these goods.

Self-employed and Entrepreneurs

In respect of these taxpayers, the STA pays particular attention to the following:

• the use of companies to provide professional services with the main purpose of channelling income, or unduly diverting personal expenses of individuals, so that the applicable tax rates are improperly reduced;
• the amounts declared by taxpayers in their tax returns to determine whether they differ significantly from those declared in the business sector to which they belong;
• the taxpayers’ income obtained from the delivery of goods or services directly to the final customer since this increases the risks and the lack of control over the payment methods, as well as potential hidden sales;
• external signs of income, wealth, profitability or financial information being inconsistent with declared income.

The regulation of tax verification and inspection procedures is stipulated in the General Tax Law (GTL) and its complementary provisions.

Within the framework of the four-year limitation period, a tax verification or inspection process may be initiated to examine compliance with tax obligations.

In general, limited audit procedures have a time limit of six months and tax inspection procedures have a time limit of 18 months, although under specific circumstances this may be extended up to 27 months. In the event that the STA does not comply with these maximum periods, the statute of limitations will not be considered interrupted. However, the inspection process must continue and conclude, even after the established deadlines have been exceeded. If this occurs, any action taken by the STA during the inspection process will not be understood as an interruption of the statute of limitations.

In 2015, the LGT was amended to include certain articles whereby the tax authorities may examine and consider operations or transactions carried out in tax periods where the statute of limitations period has expired and which may impact the tax period under examination and/or inspection. However, this does not imply that the Tax Administration is authorised to demand debts or penalties related to the limitation periods; instead, it is authorised to assess any additional tax adjustments arising in the tax period under scrutiny as a result of these statutory limitation periods.

The STA will determine in each case the place where its actions are to be carried out. These places may be:

• where the taxpayer has its tax domicile or where its representative has its domicile or office;
• where all or part of the taxable activities are carried out;
• where there is any evidence of the taxable event;
• at the offices of the STA; of
• if the taxpayer is a disabled person or a person with reduced mobility, the proceedings will be carried out in the most appropriate place for the same.

Nevertheless, tax auditors may visit, without prior notification, the companies’ offices, premises, facilities or warehouses of the taxpayer, and the proceedings shall be carried out with the latter or with the person in charge or responsible for the premises.

During the tax proceedings, both companies and the self-employed must communicate with the STA through electronic means and online platforms of the STA. Individuals are not required to use such electronic means and platforms.

The key aspects of a tax audit are outlined below.

Formal Aspects

Formal aspects include:

• evaluation of the statute of limitations and expiration periods of the procedure;
• examination of the territorial jurisdiction of the initiating body;
• analysis of possible limited verifications carried out for the same tax concept and tax periods previously;
• evaluation of the correct practice of notifications; and
• evaluation of the possible ultra vires acts of the inspecting body in the audit procedure.

Material Aspects

Material aspects include:

• determination of tax residence;
• verification of tax-deductible expenses;
• tax loss carry-forwards;
• valuation of related-party transactions;
• real allocation of assets to the economic activity carried out;
• review of real estate transactions;
• evaluation of holding, foreign and offshore companies; and
• analysis of the nature of the transactions according to GAAR.

The STA has been progressively intensifying its control activity on transfer pricing in multinational groups in recent years, carrying out a significant number of tax audits, including controls carried out simultaneously with other tax administrations (ie, USA, Portugal, Luxembourg, Switzerland and Italy), as well as amicable dispute resolution procedures and advanced pricing agreements that have an impact in this area.

Another example of this are the tax audits that have been carried out recently regarding the correct declaration of withholdings on account of the non-resident income tax to which large companies that pay dividends, interest and royalties to non-residents without a permanent establishment in our country are obliged, in particular. Specifically, the beneficial ownership of this income is being carefully examined to ensure compliance with EU regulations that aim to facilitate the free movement of capital within the territory of the Union. These intensified efforts have been made possible by the effective use of information obtained internally as well as the exchange of international information resulting from the recent ratification of the MLI and the transposition of ATAD I and II and the DAC 6 and 7 Directives.

The key strategic steps during a tax audit are as follows:

• perform an initial analysis of the tax issues in dispute (both formal and substantive/material aspects);
• provide the necessary documentary evidence at the appropriate procedural time; and
• have a solid knowledge of the relevant tax and accounting legislation, supported by extensive tax litigation experience.

The appeals/claims procedure in Spain, once an assessment or a resolution agreement of a self-assessment rectification procedure or a tax penalty has been notified by the STA, consists of two stages: (i) an administrative phase and (ii) an economic-administrative phase.

Administrative Phase

The administrative phase is optional and is activated through an appeal for reconsideration filed before the same administrative body responsible for the issuance of the assessment or a resolution agreement of a self-assessment rectification procedure or a tax penalty. As this phase is optional, the taxpayer may choose to proceed directly to the economic-administrative phase, without the need to previously file an appeal for reconsideration.

Deadline: one month from the notification of the settlement or resolution agreement of a self-assessment or tax penalty rectification procedure.

Economic-Administrative Phase

Unlike the previous one, this stage is mandatory. It begins with the filing of an economic-administrative claim against the aforementioned acts or against the decisions taken in response to such appeals for reconsideration before the economic-administrative courts (regional or central, depending on the amount and/or the administrative body issuing the act).

The claims must be submitted to the same tax administrative body that issued the tax act, who will subsequently address it, together with the corresponding administrative file, to the relevant economic-administrative court.

Deadline: one month from the settlement or resolution agreement of a self-assessment rectification procedure, serving of a tax penalty, or the decision on the appeal for reconsideration.

In the event that the claims of both the taxpayer and the STA are partially or totally rejected at this stage, there are several special review procedures that could be used in exceptional cases.

Once this phase has been concluded, taxpayers shall have access to judicial proceedings.

It is important to note that neither of these two phases (one optional and the other mandatory) requires the representation of the taxpayer by an attorney-in-fact (legal representative) or lawyer.

Administrative Phase

The STA is obliged to resolve the procedures initiated by it and/or by the taxpayer within six months. If the taxpayer has initiated a procedure for rectification of self-assessment and refund of undue income and the STA has not resolved it within such term, the taxpayer may at any time file an appeal for reconsideration or an economic-administrative claim to demand a response and protect their rights.

Similarly, if the taxpayer has filed an appeal for reconsideration with the STA and a decision has not been served within one month, the taxpayer may at any time afterwards file an economic-administrative claim for an implied negative decision.

Economic-Administrative Phase

The economic-administrative courts have the obligation to issue a decision within six months for claims amounting to less than EUR6,000, or within one year for claims amounting to more than EUR6,000. If the taxpayer does not receive a decision within the aforementioned period, the taxpayer may understand that its claim has been dismissed by implied negative decision and, therefore, have access to legal action at any time thereafter.

Notwithstanding the foregoing, in those cases in which the resolution is delayed by more than four years due to the fault of the Tax Administrative Court, the possibility of invoking the statute of limitations may be analysed.

If the taxpayer’s claim is partially or totally dismissed in the economic-administrative phase, the taxpayer may initiate a litigation or judicial phase by filing a claim within two months from the notification of the resolution issued by the economic-administrative court. In general, once the appeal has been admitted, the taxpayer will be given the opportunity to file a written statement of claim highlighting the formal and material issues reported.

It is important to point out that at this stage the representation of an attorney-in-fact (legal representative) and a lawyer is required.

The Contentious-Administrative Jurisdiction Law regulates the procedure before a judicial court. This Law, depending on the tax challenged and the amount at stake, differentiates between two types of proceedings: (i) ordinary and (ii) simplified.

If what is being challenged is a tax that is not of a local nature (ie, PIT, CIT, VAT, TSTLF), the procedure will be directly processed by the ordinary procedure (regardless of the amount disputed). On the other hand, if what is contested is a local tax (ie, real estate tax or municipal capital gains tax) and the amount is less than EUR30,000, the procedure will be processed through the simplified procedure, otherwise, it will be processed through the ordinary procedure.

This Law also regulates the review competence to be assumed by the different judicial courts in this jurisdiction, namely:

• the contentious-administrative courts;
• the high courts of justice (of the Autonomous Communities);
• the National Court; and
• the Supreme Court.

Ordinary Procedure

In this procedure, the taxpayer must file an appeal within two months from the date of notification of the administrative resolution. Once the appeal is admitted, the taxpayer is granted a period of 20 working days to file their claim, in which they must include the legal grounds and the evidence supporting the claim. Subsequently, the State Attorney (acting for the STA) will respond to the claim within the period granted for such purposes. Once the claim has been answered, the court may grant a phase of conclusions whereby both the claimant and the State Counsel must briefly argue the respective legal merits of their cases and the evidence gathered. At the conclusion of this stage, the court shall render a verdict. 

Once the first instance judgment has been rendered, the possibility of a new appeal is subject to special rules. When there is no second instance procedure (ie, when what is being challenged is not a local tax), the judgment may be appealed before the Supreme Court by means of a special appeal (recurso de casación), provided that certain requirements are met, and only on legal grounds (not factual). Therefore, in order to know whether or not it is possible to appeal a judgment before the Supreme Court, it is necessary to carefully analyse the judgment of the lower court (ie, the superior courts of justice or the National Court).

Simplified Procedure

Contrary to what happens in the ordinary procedure, the taxpayer at the time of filing the appeal must also include the facts and legal grounds contesting the administrative action, along with the relevant evidence.  Other than this requirement, the procedure largely resembles the ordinary procedure.

Finally, it is important to note that if what is challenged is the unconstitutionality of a rule or the violation of European law, the plaintiff may request in any proceeding the judicial body to file a question of unconstitutionality before the Spanish Constitutional Court or a request for a preliminary ruling to the CJEU, as the case may be.

Proof is a fundamental matter in tax litigation. It is of no use to argue the existence of facts, contracts, valuations, if such assertions are not supported by the corresponding evidence. Therefore, it is essential to provide timely advice to the client in terms of evidence not only for the tax litigation in which it may be involved but also to avoid future litigation.

Regarding the means of proof that taxpayers may use in tax controversies, tax legislation refers to the rules of civil law. Therefore, in general, taxpayers may make use of the following means of evidence:

• testimonial evidence;
• public and private documents (as regards foreign public documents, the legalisation of signatures and the Hague apostille will also be required);
• expert reports; and
• notarial acts.

Any type of evidence may be submitted at the time of filing the lawsuit (in the ordinary procedure) or at the time of filing the contentious-administrative appeal (in the abbreviated procedure). However, it should be noted that when it is proven – duly and justifiably in the administrative file – that the taxpayer’s conduct was abusive or malicious when it submitted evidence at previous stages, such evidence may be disregarded.

Likewise, it is also possible to provide evidence after filing the claim or the contentious-administrative appeal, provided that such evidence was not available or was not known at the time of filing and is relevant to the claim.

In tax litigation, the presence of witnesses is not very common, as, in most cases, the evidence is documentary and the issues to be judged are purely legal. However, when necessary, witnesses and experts may be summoned to appear and be questioned before the judicial body.

In tax litigation, the burden of proof lies with the party wishing to assert its right. This implies that, in general, the STA must prove the occurrence of the taxable event, while the taxpayer must demonstrate the existence of cases of non-taxation, exemptions or allowances and, in general, any element that reduces the tax debt.

However, in recent years, both legal doctrine and case law have adjusted these rules in certain situations. Notably, in cases involving the limitation and expiration of procedures, the STA is required to declare these ex officio, even if the taxpayer has not raised them.

Finally, it is important to note that both in the administrative and economic-administrative phase and in the contentious-administrative or judicial phase, the same general principles of the law on the burden of proof apply.

In tax controversies, it is essential from the beginning to commission and/or consult the best lawyers specialised in tax matters to have both a strong legal defense of the matter and a good procedural strategy. As stated in 3.1 Administrative Claim Phase, both in the administrative phase and the economic-administrative phase, the representation of the taxpayer by an attorney-in-fact (legal representative) or lawyer is not required. This circumstance could compromise and/or hinder a future procedural strategy in the judicial phase, as explained below.

When facing a tax inspection by the STA, taxpayers sometimes present arguments or evidence that may inadvertently compromise their position. For instance, during the administrative phase (particularly in the hearing process granted before the STA issues an assessment), taxpayers might point out procedural errors made by the STA or admit to errors in their tax self-assessment. This can give the STA the opportunity to correct these issues by either closing and restarting the file or supplementing its justification, which would prevent the taxpayer from citing these errors during an appeal.

In brief, it is crucial to strategically plan the presentation of evidence and/or arguments in tax controversies.

Case law is undoubtedly a source of law in the Spanish legal system that is of the utmost importance not only because it guarantees legal certainty and equality in the application of tax rules, but also because it plays a transcendental role in the harmonisation of the tax legal system.

At a domestic level, the only judicial body that can establish binding jurisprudence in tax matters is the Supreme Court. Its rulings must be applied and followed by all administrative and judicial bodies (ie, the National Court, the high courts of justice of the Autonomous Communities and the economic-administrative courts). However, when questions of unconstitutionality or breach of fundamental rights are raised with respect to a tax or its procedure, it is certain that the rulings of the Spanish Constitutional Court will complement and/or amend the case law that is directly affected by the Spanish Constitution and the safeguarding of the fundamental rights contained therein.

At the European level, the case law established by the CJEU (on any issue related to EU tax law) is binding both for the Spanish courts (including the Spanish Supreme Court) and the STA.

At the international level, the OECD Guidelines, although not a source of law and lacking binding legal effect, function as guidelines, references and/or framework recommendations that can serve to inspire, clarify and/or integrate the jurisprudence that may be established at the domestic and European level.

It is important to highlight which judicial body assumes the competence to hear appeals filed by taxpayers. The competence will depend on: (i) the nature of the tax appealed; (ii) the public body that issued the challenged administrative/tax act; and (iii) the amount appealed.

Contentious-Administrative Courts

These will hear in sole or first instance, depending on the applicable legislation, appeals against tax assessments of local entities and/or resolutions issued by local entities and local economic-administrative courts (in large towns) in response to such appeals.

High Courts of Justice (of the Autonomous Communities)

These will hear in sole instance appeals arising from: (i) acts and resolutions issued by the autonomous community economic-administrative courts (for amounts of less than EUR150,000); and (ii) resolutions issued by the Central Economic-Administrative Court on taxes transferred to the corresponding autonomous community.

Likewise, they must hear, as courts of second instance, appeals (for local taxes in excess of EUR30,000) against rulings and orders issued by the contentious-administrative courts.

National Court

The National Court will hear appeals in sole instance against resolutions issued by the Central Economic-Administrative Court on state taxes (for amounts exceeding EUR150,000) and acts of an economic-administrative nature issued by the central bodies of the Ministry of Economy and Finance (or any other ministerial department).

Supreme Court

The Contentious-Administrative Section of the Supreme Court will hear extraordinary appeals.

In general, there is no second judicial instance in tax matters, except: (i) in the case of local taxes whose amount exceeds EUR30,000, in which case an appeal can be filed before the same contentious-administrative court that rendered the appealed judgment and the merits of the case will be heard by the competent high court of justice; and (ii) in the event that the judgment of the court of first or second instance violates the law and/or the case law already established on the rules of State or EU law, in which case an extraordinary appeal in cassation can be filed.

Single Member Bodies (Single Judge)

• contentious-administrative courts.

Panel Bodies (at Least Three Judges)

• high courts of justice (of the Autonomous Communities);
• the National Court; and
• the Supreme Court.

In the Spanish tax system there are no conventional ADR mechanisms, since Law 47/2003 of 26 November 2003, the General Budgetary Law, prohibits the Spanish Treasury’s rights from being subject to the outcome of any judicial or extrajudicial transaction, nor may disputes arising in connection with such pending proceedings be submitted to arbitration.

Nevertheless, there are certain tools/strategies that our legal system allows/enables, and which could result in similar outcomes to conventional ADR mechanisms. In particular:

• the appraisal on the contrary (for value verification procedures);
• APAs in the field of transfer pricing;
• agreements on insolvency matters;
• agreements (also in collection proceedings) on payment deferrals or payment in instalments; and
• the documentation of the results of the verification and investigation procedure (of the inspection procedure) that facilitates agreements with the acting inspector or ensures conformity with the inspector’s regularisation proposal.

See 6.1 Mechanisms for Tax-Related ADR in This Jurisdiction.

See 6.1 Mechanisms for Tax-Related ADR in This Jurisdiction.

The approach of a binding consultation to the GTO when there are no clear interpretative criteria on the transactions to be carried out is extremely useful and important to ensure legal certainty.

The resolution issued by the GTO will be binding for the STA in charge of applying taxes in its relationship with the consultant. Likewise, the STA must apply the criteria contained in the binding resolutions to any taxpayer, provided that the facts and circumstances are identical or very similar to those included in such binding resolutions.

See 6.1 Mechanisms for Tax-Related ADR in This Jurisdiction.

See 6.1 Mechanisms for Tax-Related ADR in This Jurisdiction.

First, it should be noted that a penalty procedure is not the same as the tax debt settled by the STA (with the corresponding late payment interest accrued in its favour), but it is a separate and independent procedure from the one carried out by the STA within the framework of the limited audit or inspection procedure carried out.

Notwithstanding the foregoing, it is clear that the penalty procedure is the result of a tax application procedure. However, this should not automatically lead to the imposition of a tax penalty. A series of requirements and/or circumstances must be met in order to do so. These are: (i) an objective element; and (ii) a subjective element.

Therefore, if the STA understands that economic damage has been caused (objective element) and, at the same time, it understands that there has been fraud or negligence (subjective element) by the taxpayer when complying with its tax obligations, the tax authority may initiate such procedure (once the tax assessment has been notified) by means of a proposed tax penalty (administrative procedural act) by means of which the taxpayer will be informed of the administrative-tax infraction and why the taxpayer should be penalised (whether due to fraud or mere negligence). The taxpayer/sanctioned party may appeal against the proposed penalty (and, subsequently, if applicable, against the penalty agreement), setting out why they oppose the penalty, either because the objective element of the type of act imputed is not present (ie, the circumstances and requirements of the infringed factual situation as set out in the General Tax Law are not present) or, on the other hand, the subjective element of the type is not present (ie, there is no adequate or sufficient motivation to impose a tax penalty).

However, the tax regulations provide for a series of benefits (reductions) in the penalties imposed on taxpayers when:

• the taxpayer reaches an agreement with the inspector (actas con acuerdo), with a 65% reduction in the penalty imposed; and
• the taxpayer agrees to the regularisation carried out by the inspector (actas de conformidad), with a 30% reduction in the penalty imposed (this reduction is also applicable to limited audit procedures).

An additional reduction of 40% applies if the tax debt is paid in due time and form and, in turn, neither the tax assessment nor the penalty is appealed.

Finally, in the event that the debt resulting from the tax audit exceeds EUR120,000 (objective element) and it is proven that the taxpayer’s conduct was intentional (subjective element), it could be prosecuted as a tax crime. In this case, the administrative procedure should be suspended and the prosecution should be referred to the public prosecutor’s office. If the prosecutor or the judicial court or judge considers that there is no crime, the proceedings are returned to the STA.

See 7.1 Interaction of Tax Assessments With Tax Infringements.

See 7.1 Interaction of Tax Assessments With Tax Infringements.

As described in 7.1 Interaction of Tax Assessments With Tax Infringements, once the limited audit or inspection procedure that regularises the taxpayer’s situation with the corresponding tax assessment notified to the taxpayer has been completed, the STA may initiate a tax penalty procedure by means of a Proposed Tax Penalty notified to the taxpayer.

The STA could initiate a tax penalty procedure by means of a tax penalty proposal notified to the taxpayer. The taxpayer will have the right to submit allegations or not. Once the arguments, if any, have been reviewed, the taxpayer is served with the penalty agreement if the arguments were rejected.

In any event, this penalty agreement can be appealed through the same channels and procedures used for tax liquidations, as detailed in 3. Administrative Litigation and 4. Judicial Litigation: First Instance.

The criminal process, when the STA refers the proceedings to the Public Prosecutor’s Office or directly to the criminal jurisdiction, consists of a series of procedural stages substantially different from the administrative process, culminating in a trial before a general criminal court that decides on all kinds of criminal offenses.

See 7.1 Interaction of Tax Assessments With Tax Infringements.

If criminal proceedings are finally initiated against the taxpayer, the taxpayer may be able to reach an agreement with the Prosecutor’s Office. In order to do so it is necessary to accept all the terms indicated by the respective prosecutor (such as paying the entire tax debt and accepting a large financial penalty). In case of an agreement, the prosecutor will reduce the length of the prison sentence requested by the court (when the proposed prison sentence is two years or less, the sentence can be suspended, without resulting in imprisonment for the accused taxpayer).

Nevertheless, the STA will not be able to refer any tax offense to the Public Prosecutor’s Office when the taxpayer has regularised their tax situation (for an amount exceeding EUR120,000 per tax and fiscal year) prior to any tax audit that may be initiated against them.

Therefore, the taxpayer’s regularisation of their tax situation will prevent them from being prosecuted for possible accounting irregularities or other instrumental falsehoods that, exclusively in relation to the tax debt subject to regularisation, they may have committed prior to the regularisation of their tax situation.

The Criminal Procedure Law regulates the criminal procedure before a court of law. In general, an appeal against a conviction handed down by a criminal court of first instance for a crime against the Public Treasury may be filed before the corresponding provincial court or before the Criminal Section of the National Court if the sentence was handed down by the Central Criminal Court. An extraordinary appeal in cassation may be filed before the Criminal Chamber of the Supreme Court against the sentence issued on appeal.

In the event that any of the fundamental rights recognised in the Constitution were violated in the process, an appeal for protection may be filed before the Spanish Constitutional Court.

Within the Spanish tax penalty system, it is important to highlight the treatment given to anomalous legal transactions through the anti-abuse rules.

Administrative Proceedings

As regards business simulation (tax shams), case law has been conclusive: any simulation implies deception and, therefore, a penalty must be imposed.

However, as regards fraudulent or notoriously contrived transactions, the anti-abuse tax regulations (GAAR) exclude such transactions as generating a tax penalty, unless the STA has previously issued a conflict report (for another taxpayer) whose circumstances and facts are identical or similar to those of the latter.

Criminal Proceedings

As in the administrative procedure, any simulated transaction will be prosecuted as a tax crime.

On the other hand, fraudulent or notoriously contrived operations will not be prosecuted as a tax crime.

As mentioned in 1.2 Causes of Tax Controversies, one of the main reasons for tax controversies is “fictitious” changes in tax residence. In these cases, many of the taxpayers who remain and/or have economic interests in Spain, in turn, usually also have assets (movable and real estate) and high sources of income in other countries with which Spain has signed a Double Taxation Avoidance Treaty (DTT). In these situations, it is essential to determine whether or not the taxpayer, faced with a tax audit initiated by the STA with the intention of regularising their tax situation and considering them as a tax resident in Spain, can benefit from the protection provided by the DTT.

In these cases, taxpayers usually resolve tax residency conflicts through the internal challenge channels detailed above. However, due to potential issues such as improper application or misinterpretation of the DTTs or domestic laws, some taxpayers are increasingly turning to the Mutual Agreement Procedure (MAP). The MAP, regulated by a DTT or an arbitration agreement, involves negotiation between the tax authorities of both contracting states. The outcome of the MAP depends exclusively on the tax authorities of the contracting states, and the negotiation may not result in a satisfactory outcome for the taxpayer. This agreement will not be subject to appeal, but the tax assessments that may be issued in execution of the agreement may be subject to appeal.

Moreover, certain DTTs, such as those between Spain and Switzerland or Spain and the United States, contain arbitration provisions. These provisions ensure that arbitration can resolve disputes if the contracting states cannot reach an agreement within a specified period or if the measures taken do not comply with the DTT terms, irrespective of Spain’s position on the MLI.

In general, the national GAAR and SAAR already incorporate a principal purpose test (PPT), so neither the new provisions introduced by the MLI nor other modifications that could affect Spain’s DTTs with other contracting countries will affect the STA’s continuing application of the national GAAR and SAAR in cross-border situations covered by bilateral tax treaties, without thoroughly analysing possible conflicts between national and conventional rules.

In any case, and as advanced in 1.4 Efforts to Combat Tax Avoidance, the STA has recently been taking a proactive stance in implementing, indirectly and ahead of time, the Proposal for a Council Directive establishing rules to prevent the abuse of shell companies for tax purposes and amending Directive 2011/16/EU (ATAD III) through the publication of reports of the Advisory Committee on the conflict in the application of the rule provided for in the Spanish General Tax Law (national GAAR).

In general, transfer pricing adjustments are usually disputed in national tax courts.

However, the Convention 90/436/EEC of 23 July 1990 on the elimination of double taxation in connection with the adjustment of profits of associated enterprises is becoming increasingly important for those cases in which it is intended to adjust for tax purposes related transactions between persons or entities located in different member states, in order to ensure that the adjustments are bilateral and do not give rise to double taxation situations. This agreement provides for an amicable procedure for the member states involved to mutually agree on the amount of the tax adjustment.

Similarly, the MAP – regulated by a DTT or in an arbitration agreement – is being used with the tax authorities of other contracting states to avoid double taxation situations in transfer pricing adjustments.

In recent years, the use of APAs by taxpayers (large companies) has become more widespread. APAs are being used to guarantee certain tax bases for future taxation and to provide the companies involved with certainty as to the tax treatment of their operations, thereby avoiding future tax audits.

The main stages of an APA in the Spanish legal system are as follows:

• Presentation: In this phase, the interested taxpayer identifies the parties, describes the transactions and valuation proposal, sets out the valuation method or criterion applied and provides other data, elements and documents that may help the STA reach its decision.
• Evaluation: In this phase, the STA will examine the documentation presented by the taxpayer.
• Resolution: The APA procedure will result in either (i) an approval, (b) a rejection or (c) a declaration of inadmissibility, although this procedure could also conclude through expiration or the taxpayer’s withdrawal.

The cross-border issues that generate the most tax controversies in our legal system are:

• transfer pricing issues in transactions with related parties;
• tax-deductibility of intra-group financial expenses;
• payment of dividends, interest and royalties to non-residents without a permanent establishment in our country; and
• tax residence issues of individuals and legal entities (particularly contentious when it comes to the effective management of companies).

In 2009 and 2011, the European Commission declared as state aid (incompatible with the internal market) the tax deduction of the goodwill paid by Spanish entities in the acquisition of non-resident entities in the scope of the CIT (Decision 2011/5/EC and Decision 2011/282/EU). This issue was ratified by the CJEU in 2018, obliging the beneficiary entities to reimburse the tax aid unduly obtained by the STA, except in certain cases covered by the principle of legitimate expectations.

Meanwhile, in 2014, the European Commission issued a third decision (Decision 2015/314) by which it classified as unlawful state aid the amortisation of goodwill arising on the acquisition of foreign holding entities, on the basis that a binding reply to a consultation issued by the GTO had extended the scope of application of the tax amortisation of goodwill to the acquisition of indirect foreign shareholdings. However, this last decision was annulled in 2023 by the General Court of the European Union (GCEU) on the basis that the first two decisions (2009 and 2011) already covered both direct and indirect acquisitions. The Commission has appealed to the CJEU.

Although the execution of the recovery of state aid may be carried out in the course of an inspection procedure, two specific procedures are foreseen to carry out administrative actions aimed at the recovery of state aid:

• recovery procedure in cases of regularisation of the elements of the tax liability affected by the decision; and
• recovery procedure in other cases (ie, when the execution of the recovery decision does not imply the regularisation of a tax liability).

The administrative decision issued in both procedures can be appealed through the same channels and procedures as those for tax assessments detailed in 3. Administrative Litigation and 4. Judicial Litigation: First Instance.

Taxpayers affected in the enforcement of state aid recovery have been forced to appeal both to the economic-administrative courts and to the judicial courts (including the Supreme Court) due to, among others, formal defects and the incorrect calculation of accrued late payment interest.

There are cases where taxpayers have pursued state liability procedures concerning this matter.

Spain has agreed to submit unresolved amicable proceedings to binding arbitration. In principle, the arbitral award is binding, although Spain intends to make it non-binding if a different agreement is reached between administrations within three months of the decision.

In any case, this arbitration system does not completely displace the ordinary litigation process; for example, Spain excludes from arbitration any issue on which an administrative or jurisdictional body has already ruled, or on which it ruled prior to the arbitral decision.

Likewise, Spain chooses to exclude from this arbitration certain situations:

• regularisations that have been based on a conflict in the application of the tax rule and simulation (national GAAR)
• cases that have given rise to the commission of certain tax offences or crimes against the Public Treasury;
• transfer pricing cases relating to elements of income or wealth not taxed in another jurisdiction or covered by Convention 90/436 on arbitration; and
• when the competent authorities of Spain and the other contracting state agree that the resolution of the case through this arbitration is not appropriate.

In the DTTs between Spain and Switzerland and Spain and the USA, arbitration settlement is provided for.

See 10.1 Application of Part VI of the Multilateral Instrument (MLI) to Covered Tax Agreements (CTAs).

Spain has not made any reservation to the application of Baseball Arbitration. Therefore, it will apply this by default, unless the other state concerned has opted for the independent opinion procedure, in which case this shall be the type of arbitration applicable.

Through the transposition in 2020 to the Spanish legal system of Council Directive (EU) 2017/1852 of 10 October 2017 on tax dispute resolution mechanisms in the European Union, the MAP has been consolidated as an international dispute resolution mechanism.

In general, tax disputes of an international nature are usually appealed in national tax courts.

Pillar 1 and Pillar 2 emphasise intergovernmental co-operation to resolve double taxation issues and ensure proper implementation. This presents both challenges and opportunities for states’ tax authorities to share information and work collaboratively.

Unlike Convention 90/436/EEC and Directive 2017/1852, the outcome of proceedings (arbitral awards) in tax arbitration provided for in the MLI tend not to be published.

See 10.5 Existing Use of Recent International and EU Legal Instruments.

In principle, representation of the taxpayer by an attorney-in-fact (legal representative) or lawyer is not required in tax arbitration provided for in the MLI.

Both the administrative phase and the economic-administrative phase are free of charge.

In the judicial or contentious-administrative phase, the representation of an attorney-in-fact (legal representative) and a lawyer is required.

In the First or Only Instance

If one of the parties (the taxpayer or STA) has its claims completely dismissed, it must pay the court costs, unless the court finds serious doubts about the facts or the applicable law. However, the costs may be limited to a total amount not exceeding one-third of the amount of the proceeding, for each of the parties that has prevailed; for these purposes only, claims of an undetermined amount will be valued at EUR18,000, unless, due to the complexity of the case, the court reasonably decides otherwise. When the judgment recognises some claims but not others, in general, each party shall pay its own costs.

In the Second Instance

If the appellant’s appeal is dismissed, the appellant must bear the costs of the proceedings. However, they may also be limited.

Appeal Before the Supreme Court (Recurso de Casación)

If the appellant is unsuccessful in the preparation of the appeal, they will generally bear the costs in the amount of EUR1,000 (if the State Attorney filed an opposition, this amount would be EUR2,000). If the preparatory proceedings have been successful, the court shall decide whether to impose the costs in full, in part or up to a maximum amount. However, when there is reasonable doubt about the application of the rule, no costs/fees will be imposed on the parties.

If the taxpayer’s claims are upheld and the court recognises the right to reimbursement of court costs, the STA must pay the amount fixed by the court to the taxpayer.

In addition to the costs, if the tax assessment is null and void, the STA must refund the taxpayer the amount paid plus the late payment interest accrued in its favour. If the debt is suspended, the STA must also pay the taxpayer the cost of the guarantees provided.

Likewise, if the STA has acted in bad faith, recklessly or with a lack of diligence in the verification, inspection or collection procedure, the taxpayer may consider initiating a liability procedure.

See 6.1 Mechanisms for Tax-Related ADR in This Jurisdiction.

There are no publicly available statistics on pending cases.

On an annual basis, the economic-administrative courts present a report containing the total number of tax claims filed and resolved.

The last report published corresponds to the tax year 2022, where:

PIT

• claims filed: 57,656;
• claims resolved: 67,228;
• claims estimated (ie, won by the taxpayer): 30,470; and
• claims dismissed: 29,506;

CIT

• claims filed: 10,893;
• claims resolved: 14,555;
• claims estimated (ie, won by the taxpayer): 5,366; and
• claims dismissed: 8,047.

VAT

• claims filed: 31,088;
• claims resolved: 38,507;
• claims estimated (ie, won by the taxpayer): 17,626; and
• claims dismissed: 17,879

Based on the information in 12.2 Cases Relating to Different Taxes, approximately half of the tax controversies in the economic-administrative phase are won by the taxpayer.

Regarding the judicial phase, there are no publicly available statistics on the proportion of tax cases that are won or lost.

See 2.6 Strategic Points for Consideration During Tax Audits.