We conduct valuation studies and documentation processes for related-party transactions following the law.

The law establishes that transactions conducted between related persons or entities shall be valued at their market value; the market value is understood to be that which would have been agreed by independent persons or entities under conditions that respect the principle of free competition.

The list of related persons or entities is broad, as the following are considered to be related parties: (i) an entity and its partners or shareholders; (ii) an entity and its directors or managers, except in respect of remuneration for the exercise of their functions; (iii) an entity and the spouses or persons related by blood or marriage up to the third degree of consanguinity or affinity of the partners or participants, directors or managers; (iv) two entities belonging to a group; (v) an entity and the directors or managers of another entity, when both entities belong to a group; (vi) an entity and another entity in which the former holds indirectly at least 25 per cent of the share capital or equity; (vii) two entities in which the same partners, participants or their spouses, or persons related directly or collaterally by blood or marriage up to the third degree, hold, directly or indirectly, at least 25 per cent of the share capital or equity; and (viii) an entity resident in Spanish territory and its permanent establishments abroad.

To justify that the transactions conducted have been valued at their market value, these related persons or entities must keep at the disposal of the tax authorities, following the principles of proportionality and sufficiency, the documentation determined by the corporate income tax regulations.

However, it is envisaged that this documentation will have simplified content concerning related persons or entities whose net turnover is less than 45 million euros. In no case will the simplified content of the documentation apply to the following transactions. (i) those carried out by personal income taxpayers, in the course of economic activity, to which the objective assessment method is applicable with entities in which they or their spouses, ascendants or descendants, individually or jointly between all of them, hold a percentage equal to or greater than 25 per cent of the share capital or equity; (ii) business transfer transactions; (iii) transactions involving the transfer of securities or shares representing a share in the equity of any type of entity not admitted to trading on any of the regulated securities markets, or which are admitted to trading on regulated markets located in countries or territories classified as tax havens; (iv) transactions involving real estate; (v) transactions involving intangible assets.

The determination of the applicable market value is carried out in accordance with one of the five methods provided for by law, which are as follows: (a) Comparable free price method, whereby the price of the good or service in a transaction between related persons or entities is compared with the price of an identical good or service or one with similar characteristics in a transaction between independent persons or entities in comparable circumstances, making, if necessary, the necessary corrections to obtain equivalence and taking into account the particularities of the transaction; (b) Cost plus method, whereby the margin customary in identical or similar transactions with independent persons or entities or, in the absence thereof, the margin that independent persons or entities apply to comparable transactions is added to the acquisition value or production cost of the good or service, making, if necessary, the adjustments required to obtain equivalence and to take into account the particularities of the transaction; (c) Resale price method, whereby the margin applied by the reseller himself in identical or similar transactions with independent persons or entities or, failing this, the margin applied by independent persons or entities in comparable transactions is subtracted from the selling price of a good or service, making, if necessary, the necessary corrections to obtain equivalence and to take into account the particularities of the transaction; (d) The profit or loss allocation method, whereby each related person or entity that jointly enters into one or more transactions is allocated that portion of the common profit or loss arising from such transaction or transactions on a basis that appropriately reflects the terms that would have been entered into by independent persons or entities in similar circumstances; (e) the net operating margin method, which attributes to transactions with a related person or entity the net profit or loss, calculated on the basis of costs, sales or the most appropriate amount based on the characteristics of identical or similar transactions between independent parties, making, where necessary, adjustments to obtain equivalence and to take into account the particularities of the transactions.

The choice of valuation method should consider, among other things, the nature of the related transaction, the availability of reliable information, and the degree of comparability between related and unrelated transactions. And where it is impossible to apply the above methods, other accepted valuation methods and techniques that respect the principle of free competition can be used.

The sanctioning regime established by the law for non-compliance with the rules of related transactions is extensive, so specialised tax advice is essential for this type of transaction and the correct documentation, if any, of valuations and other requirements of related transactions.

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