What comes first, the partner or the partnership? The Tax Agency targets professional companies

Beltrán Sánchez
Partner of Bové Montero y Asociados

For some time now, we have been reading in the media about actions taken by the Tax Authorities against well-known personalities (several ministers, radio broadcasters, sportsmen and women and influencers, among others) for using companies to exercise liberal professions or other activities or services of a highly personal nature.

The main argument used by the Tax Authorities to carry out these regularisation operations is the reduction in taxation through the use of companies, with tax rates of 25%, compared with Personal Income Tax, with marginal rates that can reach 54%, depending on the region.

It should be noted that this reduction in taxation is a problem that should have been overcome by now, since the partner cannot make private use of the company’s money or assets, which must be related to the business activity. If the partner wants to use this money, he will have to receive dividends, which, in addition to what has already been taxed for corporate income tax purposes, may be taxed at a rate similar to the 54% mentioned above. At best, this could be a tax deferral.

At this point we must remember that setting up and using a company to carry out a business activity is a legitimate, even advisable, act because, apart from the horrendous tax maze we are discussing, such legal vehicles serve to limit the liability of partners, facilitate the raising of capital and provide credibility in the marketplace.

Strangely enough, the tax issue is not about the use of a company as a means of providing a service, but about the remuneration of the partners. How much should a partner earn for his professional activity?

In many cases, the Tax Authorities consider that the services provided through the company are of a very personal nature and allocate the income in full to the partner, as if there were no company involved, on the grounds that the services are not provided at market prices.

A real market study would show that many professional service companies with sufficient material and human resources allocate part of their profits to investment in their own business, another part of the profits made returns to the capital in form of dividends, while others return the activity of the partners. Moreover, in a market situation, it would be very difficult to find a company that distributes 100% of its profits to its partners as compensation for services rendered.

An analysis of recent decisions shows that the courts do not always agree with the Tax Authorities, and that in about half of the cases the taxpayer has won.

We can say that there is undoubtedly a common denominator in the cases where the taxpayer was ultimately successful: the companies had material and/or human resources in addition to their own partner resources, which generally correspond to employees who play a relevant role in the development of the company’s activity.

However, this is not the only reason why the courts have ruled in favour of taxpayers. Contracts also play a key role in determining which services can be considered as highly personal and which cannot. For example, the Audiencia Nacional clarifies that fees charged in return for assuming the risk of achieving objectives (success fee clauses) cannot be considered highly personal services.

In any case, it seems that by focusing solely on the tax aspect of this issue, the authorities often forget that the solution they offer us (attributing all income to the partner) leads to the decapitalisation of the companies.

This decapitalisation means that the company will not be able to meet any claims from third parties because it will have no funds, while the partner’s assets will be protected from any loss (could this not be considered as concealment of assets?). The same situation makes it very difficult to obtain financing either from banks or from third parties.

The partner is therefore left with two options: either to put his own assets at risk by providing guarantees (behaviour contrary to the purpose of setting up a company), or simply to let the company die in the event of a contingency. The main victims would therefore be third parties who could claim any amount from the company.

From a rational point of view, it would be desirable to seek a clear distinction between the personal assets of the partners and the assets of the company and, of course, to require companies to hold the assets necessary and appropriate to the activity they carry out and, therefore, to retain part of the profits generated.

You can read the original article published in the paper version of Cinco Días.

You can read the original article published in the online version of Cinco Días.