If you are providing a service to a company of which you are a partner and that company is the one providing the same service to third parties, it is important to remember that transactions between related persons and entities must be properly valued on an arm’s length basis. This means that the price that would have been agreed by independent persons or entities on terms that respect the arm’s length principle must be established.
However, in some cases, the administration understands that, although there is a related company, the service is being provided directly by the natural person to the independent third party and that the company is not involved in the provision of the service.
The service provided by a natural person to a related company and that provided by such a related company to independent third parties is substantially the same when it is the provision of a service of a very personal nature and when the related company lacks the means to carry out the transaction or provide the agreed service except through the necessary and indispensable participation of the natural person, the company not providing added value (or this being residual) to the work of the natural person.
Consequently, the Administration tries to avoid that most of the profits obtained from services rendered with the personal intervention of the professional are taxed within the companies at a lower tax rate (the corresponding corporate income tax rate: 25%) than if they had been assessed at the headquarters of the individual (maximum marginal rate of approximately 45% of the personal income tax rate).
In this context and, following a check, a regularisation could be made attributing the income received by the entity to the natural person. Therefore, in view of this possible risk, the analysis of the correct taxation requires analysing whether the material and human resources through which the services are provided are owned by the natural person or by the legal entity, the latter acting as an autonomous and self-sufficient centre for the provision of services in the market. Furthermore, the company must not only have the means, but these must also be oriented towards the development of its own activities.
