In a groundbreaking ruling, the Supreme Court concludes that the tax authorities cannot use transfer pricing regulations to deny the deduction of expenses that a Spanish company has incurred with third parties, even if the underlying business decision has been taken by the group.
In recent years, there have been numerous cases in which the Tax Administration has rejected the deductibility of expenses borne by Spanish subsidiaries of multinational groups, when the operations or decisions that have given rise to such expenses have been carried out or adopted by the group. For the Administration, the transfer pricing regulations endorsed this type of regularization, on the basis that the assumption of this type of expense would not have been accepted between independent parties.
However, the Supreme Court has rejected this approach in its judgment 631/2026, of 25 May, in which it has annulled and partially annulled the judgment of the National Court of 31 March 2023, establishing a doctrine of notable practical relevance for multinational groups with subsidiaries in Spain.
The case analyzed is caused by the restructuring of the business of a group in Spain, in which the Spanish subsidiary operated as a manufacturer to order for its related entity in Belgium, which acted as its only customer. As a result of the group’s decision to relocate production activity to other countries, the Spanish entity’s factories were closed, which generated restructuring costs for the latter, mostly derived from redundancy plans (ERE) and other terminations of employment contracts.
The tax authorities considered that the Spanish company, as a limited-risk manufacturer, should not have assumed those costs at arm’s length; therefore, it rejected their deductibility in Corporate Income Tax. It relied on Spanish regulations on related-party transactions (article 16 of the Consolidated Text of the Corporate Income Tax Law -applicable in the revised year-, current article 18 of the Tax Law) and the OECD transfer pricing guidelines.
The National High Court confirmed this criterion, although it recognized a certain inconsistency in the adjustment made, since it had not been specified what part of the costs should reasonably have been borne by the Spanish entity, if any.
The Supreme Court, however, departs from this approach and resolves the controversy for a more intuitive and direct reason, understanding that the preliminary question is not which entity must bear the costs in the framework of a functional transfer pricing analysis, but whether the regulations on related-party transactions can be applied when the expenses whose deductibility is analyzed do not derive from a transaction between related parties.
The doctrine established by the Supreme Court is clear: the application of transfer pricing regulations must be limited to related-party transactions, so it cannot be considered in legal relations with third parties.
The Court highlights that, in the case under analysis, the expenses in question were directly caused by relationships with unrelated third parties. Specifically, approximately 65% of the closing costs were directly related to the ERE, a percentage that exceeded 80% if the reindustrialization, relocation and legal costs linked to these files were considered. These expenses were incurred with workers, insurers and service providers, validated by the competent labour authorities, paid by the Spanish entity and recorded in the accounts in the corresponding years, complying, in short, with all the tax deductibility requirements.
The Court also stresses that the OECD transfer pricing guidelines cannot be used autonomously to deny the deduction of expenses if there is no related-party transaction. In other words, as the Supreme Court stresses: the application of the guidelines is subject to the fact that we are dealing with related-party transactions.
Being outside this budget, the Tax Administration lacked a legal basis for the adjustment made.
The Court adds that, if the Administration’s intention was to question relations with third parties, it should have resorted to the general clauses of the General Tax Law on classification, conflict in the application of the tax rule or simulation (articles 13, 15 and 16), figures that are subject to their own procedural requirements and guarantees.
From a practical point of view, the judgment is very relevant, since it limits the use of the regulations on related-party transactions, which operates as a rule for the valuation of transactions between related parties, but not as a general clause to deny the deductibility of expenses derived from relationships with third parties; without prejudice to the fact that, as the Court points out, there may be other ways to analyze this type of expense, and always taking into account compliance with the general rules for the deductibility of expenses in Corporate Income Tax.
