Tax Simulations

Interpretation of Tax Simulations for the Spanish Supreme Court

Next we will explain the most significant considerations that followed the Supreme Court’s ruling of September 26, 2012:

• The essence of this figure is the difference between real and declared object of the contract. There are two different ways of simulation, absolute and relative:

1. 1. Absolute: When behind the created appearance, contract, there is no cause/object at all. Behind the simulated business there is nothing, there is no other business.
   2. Relative: When behind the simulated business there is another one. And this hidden business is the one that corresponds to the true intention of the parties.

• Relative tax simulation exists when the business created is not what the parties really wanted. They were looking for a different legal business (the simulated one). The simulation is produced when the object/cause expressed in the contract does not exist, because it responds to another purpose. Relative simulation is a fake situation produced by generating the appearance of a fictional business. Unwanted business that is used as a cover-up by the parties.
• For relative tax simulation, the created business must not be the business really wanted.
• The tax simulation is declared by the Tax Administration. If there is a tax simulation situation, the Tax Administration will issue another liquidation according to the real taxable event carried by the parties.
• Tax simulation qualification must consider the parties’ intention, it must be based on their true willing. It will be also based in the contract’s consequences.
• The Supreme Court considers that there is tax simulation when: (i) A business or a series of business are carried out under a different way/contract than the one that justifies them; (ii) there is no justification or express cause for this contract, as it responds to a different purpose.
• The Supreme Court considers that what is really relevant to determine the simulation is to discover the fraud mechanism used. To discover the real intention of the parties. The underlying business that was intended to be hidden from the tax regulations. This purpose from the parties must be always intentional.

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Integral elements

• In order to prove tax simulation, the three following elements must be present:

1. 1. A statement of the deliberate disagreement with the true will of the parties.
   2. Purpose of concealment from third parties (from the Tax Administration).
   3. The burden of proof is on the Tax Administration.

• The simulation is not only fraud or abuse of the law. It assumes that the business conducted is real. There is no hiding of one business under the appearance of another. It seeks to rely on a rule that is not the one suitable. It is a conduct that appears to conform one rule but it produces the opposite result for a different ruling.

Tax simulation responds to the concealment of a real legal business, mainly with the aim of reducing the tax burden. It is necessary for the Tax Administration to probe the simulation. Not all tax planning operations are fraudulent. That is why the Tax Administration must probe the existence of tax simulation with valid economic reasons.

If this article has been of interest, we also suggest you to read the following article published on our website:

Should a fraudulent debtor be equally responsible to the negligent debtor?