Supreme Court: Full Regularization Principle for Companies Without Economic Activity

Full Regularization in Cases of Non-Active Companies

The Supreme Court addresses whether the principle of full regularization should be applied when it is determined that a company has no economic activity.

The Supreme Court Ruling of July 23, 2024 (rec. 8950/2022) answers the question regarding the appropriateness or inappropriateness of the application of the principle of full regularization in cases in which the economic activity of a company has been considered non-existent.

In the case that gives rise to the ruling, the AEAT carried out a regularization of a taxpayer who provided professional services through a company, considering the Inspection that there had been a simulation in accordance with art. 16 of the General Tax Law, given that said company did not have sufficient means to carry out an economic activity, but was limited to the management of assets, and was therefore an intermediary company.

In the regularization carried out, all the income obtained by the company was attributed to the only partner of the company and, therefore, the personal income tax payments declared by the partner were adjusted upwards. In the same way, it was considered that the exemption in Wealth Tax set out in article 4. Two of Law 19/1991 could not be applied to the shares obtained from the company.

The ruling concludes that, once the partnership's income has been eliminated as it is considered that the services were rendered only by its partner as an individual, the theoretical value of the partnership cannot remain unaltered, but its variation must be reflected. That is to say, if it is considered that there is no economic activity in the partnership and the partner is imputed the income of the same, and this criterion is followed to deny the exemption of the participations in the Wealth Tax, the impact on the valuation of the participations as a consequence of the decrease in the net worth must be taken into account, in accordance with the principle of full regularization.

Therefore, the SC considers that the regularization carried out by the AEAT was incomplete, since the value of the shares should have been set at a different value than the one calculated at the beginning, in order to allow the deduction of the new value of the shares from the Wealth Tax for the regularized years, at the same time as the increase of the personal income tax liability.