Related-party transactions in Corporation Tax: what they are, form 232 and how to document them

Once again this year, the date for filing form 232 is approaching, which takes place during the month of November for those companies that close their tax year on 31 December. For many, this form is probably completely unknown, but it is very important for companies to be aware of it and to assess whether they are obliged to file it. Well, this is an information form that falls within the scope of the regulation of ‘related-party transactions’ in Corporation Tax, which are very common in business groups, either between the companies that make up the group or with their partners and administrators.

Valuation of related-party transactions at market value

These transactions between non-independent parties, due to certain commercial or family connections, are always ‘under suspicion’ for the tax authorities. The administration considers that they could be agreed at a price different from the market price and increasingly reviews them in its verification and inspection processes.

They are regulated in the Corporation Tax Act and its Regulations, with the aim of establishing a series of information and documentation controls to prevent fraud. The regulation establishes that all these transactions must be carried out at their normal market value, which would be agreed between totally independent parties under conditions of free competition.

Which persons or entities are considered related?

The law determines the following as the main cases of linkage:

1. An entity and its partners or participants (with a shareholding of 25% or more)
2. An entity and its directors or officers, except in matters related to remuneration for the performance of their duties.
3. An entity and the spouses or persons related by direct or collateral line, by consanguinity or affinity, up to the third degree of the shareholders or participants, directors, or officers.
4. Two entities belonging to a group.
5. An entity and the directors or officers of another entity, where both entities belong to a group.
6. An entity and another entity in which the former holds indirectly at least 25 per cent of the share capital or equity.
7. Two entities in which the same partners, participants or their spouses, or persons related by blood or marriage up to the third degree of kinship, directly or collaterally, directly or indirectly, hold at least 25 per cent of the share capital or equity.
8. An entity resident in Spanish territory and its permanent establishments abroad.

Form 232: how to document related-party transactions

In this respect, there are certain specific documentation obligations to be fulfilled by companies, which increase according to the volume of transactions:

• For small companies, those whose volume of transactions does not exceed 10 million euros, it is only necessary to complete a standardised document (Annex V of Order HAP/871/2016, of 6 June), which is submitted together with the annual Corporation Tax return (as a preliminary document). This document describes the nature, characteristics and amount of the related-party transactions, identifies the parties involved in the transaction and the valuation method used and resulting values, this information being sufficient as mandatory documentation.

• For entities with a turnover of less than 45 million euros, the specific documentation is similar to the aforementioned information in the standardised document, and the comparables obtained must be supported.

• For entities with a turnover of 45 million euros or more, the specific documentation must contain much greater detail, in particular that referred to in Article 16(1) of the Corpration Tax Regulation.

The transactions that mainly have to be reported/documented are in any case those carried out with the same person or related entity, which in the same financial year exceed a market value of 250,000 euros, as well as specific transactions when they are of the same type, the same valuation method is used and they exceed a combined market value of 100,000 euros. There are some specific transactions that must be reported/documented in any case: transfer of businesses, securities or participations, as well as transactions with real estate and intangibles.

In addition, all companies that carry out transactions within the thresholds and typologies mentioned in the previous paragraph must complete information form 232, which, as indicated at the beginning, must be filed during the month of November following the close of the financial year in question (for financial years closed on 31 December). In November 2024, the operations for the financial year 2023 will be reported on this form.

If the entities involved are part of the same tax consolidation group, there is no specific documentation requirement.

Failure to comply with the valuation, reporting and documentation obligations required by the regulations may result in penalties of up to 1% of turnover or 10% of the combined amount of the related-party transactions or 15% of the value adjustments made.

Primary and secondary adjustment for discrepancy between declared value and market value in related-party transactions

The way in which the Administration regularises this type of transaction when it understands that there is a discrepancy between the declared value and the market value always involves a bilateral (primary) adjustment, and in cases where the transaction is between a partner and a company, it may also involve a secondary adjustment.

For example, a holding company invoices for services in 2022 to a wholly-owned subsidiary, both of which are Spanish, and the tax authorities determine that there is an undervaluation of the services:

Declared price: 300,000 euros

Market price: 500,000 euros

Adjustment 200,000 euros

This (primary) adjustment should be bilateral, as a higher income in the holding entity and a higher expense in the subsidiary.

In addition, unless it is proven that there is an economic restitution of the difference between the two entities (basically a payment for the increased value of the services), the tax authorities will make a secondary adjustment to bring the difference back to its true nature.

In this case, for the investee company, as the holding company holds 100%, its equity will be considered to be increased by that amount, while for the holding company the difference will be treated for tax purposes as an increase in the value of the holding.

This may be particularly relevant if the holding company subsequently sells the holding, as the tax value of the acquisition is higher and the possible capital gain on the sale is therefore lower. In short, the income is eligible for the 95% exemption provided for in Article 21.3 of the Corporation Tax Act.

Conclusions: Form 232 and documentation obligations

It is advisable to carry out an analysis of this type of operation in order to identify them, determine their amounts and adequately support their valuation, complying with the regulations on information/documentation and filing the corresponding form 232, if applicable.

Do you need advice? Access our area related to related-party transactions:

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