Interposed Companies & Limitation Periods: Spanish Supreme Court Requires the Tax Administration To Apply the Effects of Simulation Consistently

The Spanish Supreme Court has established an important criterion concerning interposed companies, tax simulation, limitation periods and the principle of full regularisation. In Judgment 990/2026 of 24 July 2026, the Court’s Contentious-Administrative Chamber held that, where the Tax Administration classifies a transaction as simulated, it must apply the consequences of that classification consistently to all tax periods and tax liabilities that are not time-barred. The fact that the limitation period has expired for the individual’s Personal Income Tax does not allow the Tax Administration to maintain a Corporate Income Tax treatment that is inconsistent with the simulation identified by the tax inspection authorities.

The judgment, Spanish Supreme Court Judgment 990/2026 of 24 July 2026, cassation appeal 7200/2023, ECLI:ES:TS:2026:3467, addresses an issue of particular relevance in tax adjustments involving corporate structures used to channel services that are in fact provided personally by shareholders or directors.

The proceedings concerned KORGA, S.L., whose principal shareholder, holding 88.53% of its share capital, was also its sole director. Its activities included the provision of management and technical advisory services to CÀRNIQUES DE JUIÀ, S.A., a company in which KORGA held a 50% interest and whose board of directors was chaired by the same shareholder. KORGA had no human resources other than those provided by him.

The tax inspection authorities found that relative simulation existed in relation to certain services invoiced by KORGA, on the basis that those services had in fact been personally provided by the shareholder-director through the interposition of the company. As a result, for the 2014 to 2016 tax periods, the Tax Administration reduced the company’s Corporate Income Tax taxable base and increased the shareholder’s Personal Income Tax taxable base.

The dispute arose in relation to 2013. The Tax Administration’s right to assess the shareholder’s Personal Income Tax for that year had become time-barred, whereas the company’s Corporate Income Tax remained open to assessment. The Tax Administration therefore decided not to apply to the 2013 Corporate Income Tax return the same consequences that it had attributed to the simulation in subsequent years.

The Supreme Court rejected that approach. Its reasoning is based on a fundamental requirement: the Tax Administration must act consistently with the legal classification that it has itself adopted.

Article 115.2 of the Spanish General Tax Act (Ley General Tributaria, or LGT) allows the Tax Administration to classify the facts, acts and transactions under examination irrespective of the classification previously given to them by the taxpayer. However, where the underlying facts are the same across different tax periods, that power does not permit the Administration to adopt contradictory classifications or legal consequences.

The Court held that the principle of legal certainty, enshrined in Article 9.3 of the Spanish Constitution, requires the same classification to be maintained where the relevant facts are substantially identical. If the Tax Administration has treated a transaction as simulated for the 2014 to 2016 tax periods, it cannot treat the same transaction as though no simulation existed in 2013 merely because the Personal Income Tax liability for that year has become time-barred.

The consequence is clear. The expiry of the limitation period prevents the Tax Administration from assessing the shareholder’s 2013 Personal Income Tax, but it does not prevent it from applying to the company’s 2013 Corporate Income Tax, which was not time-barred, the consequences arising from the simulation already identified.

The judgment also defines the scope of tax limitation periods with particular precision. The Supreme Court reiterates that limitation periods are grounded in the principle of legal certainty and that, once the statutory period has expired, the Tax Administration can no longer determine the corresponding tax liability.

The Court therefore rejects the argument that considerations of tax justice or a potential loss of tax revenue may justify a different result. The fact that the limitation period prevents the Personal Income Tax assessment of the shareholder does not entitle the Tax Administration to preserve a tax liability at company level that contradicts its own legal classification of the transaction.

Accordingly, there is no administrative power to offset indirectly the consequences of a limitation period through a different tax. A time-barred tax liability remains outside the scope of assessment, while a liability that is not time-barred must be determined in accordance with the applicable legal classification.

The Supreme Court links this conclusion to the principle of full regularisation, under which the Tax Administration must consider the taxpayer’s overall position, including both adverse and favourable consequences.

This principle prevents a tax inspection from being limited to adjustments that benefit the Tax Administration and requires all necessary corrections to be made in order to restore the tax position that is legally appropriate.

In the case before the Court, the inability to assess the time-barred Personal Income Tax did not entitle the Tax Administration to retain the relevant income within the company’s Corporate Income Tax taxable base where, according to its own classification, that income arose from an activity actually carried out by the individual. As the judgment makes clear, the limitation of one tax cannot be used as a basis for requiring a company to pay another tax for which, according to the Tax Administration’s own classification, it would not be liable.

The Supreme Court expressly states its doctrine: where the Tax Administration classifies a transaction as simulated, it must extend the effects and consequences of the resulting tax adjustment to all tax periods that are not time-barred. If the simulation requires income and expenses to be removed from the company’s Corporate Income Tax taxable base because the activity was in fact carried out by an individual, the fact that the limitation period for that individual’s Personal Income Tax has expired does not allow the Tax Administration to disregard those same consequences for Corporate Income Tax where that tax remains open to assessment.

The scope of the ruling should be carefully distinguished. Judgment 990/2026 does not reconsider in these proceedings whether simulation actually existed, nor does it establish a general rule concerning the validity of professional services companies or other service companies. The issue determined by the Court is narrower: once simulation has been established, the Tax Administration must apply its legal consequences consistently while also respecting the effects of limitation periods.

The Supreme Court upheld the cassation appeal, set aside the judgment of the High Court of Justice of Catalonia and held that it was unlawful for the Tax Administration to decline to apply the effects of simulation to the company’s 2013 Corporate Income Tax on the grounds that the corresponding Personal Income Tax liability of the shareholder had become time-barred.

Judgment 990/2026 therefore strengthens an important safeguard in tax inspection proceedings involving interposed companies, professional services companies and corporate structures used for the provision of services: the Spanish Tax Administration may investigate transactions and, where the statutory requirements are met, establish the existence of simulation, but it must apply the resulting consequences consistently and in accordance with both limitation rules and the principle of full regularisation. At ILIA ETL GLOBAL, we advise on these tax adjustments from an integrated legal and tax perspective, assessing both the correct classification of the transactions concerned and the consequences that the Tax Administration seeks to attribute to them for each tax and tax period, with particular attention to the latest case law of the Spanish Supreme Court.

Article prepared by our colleague Xavier Vilalta.

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