Transfer pricing is the area of highest tax risk for multinational groups operating in Spain. The AEAT has intensified its audit activity in this area since 2020, driven by the OECD's BEPS (Base Erosion and Profit Shifting) recommendations and the need to defend the Spanish tax base against strategies for shifting profits to lower-tax jurisdictions. This whitepaper provides a practical and comprehensive guide to the current regime.
Regulatory framework: Article 18 LIS and Royal Decree 634/2015
Primary legislation
Spain’s related-party transactions regime is governed primarily by Article 18 of Law 27/2014 on Corporation Tax (LIS), which establishes:
- The arm’s length principle: transactions between related entities must be valued at market price — the price that would have been agreed between independent parties in conditions of free competition.
- The definition of related entities: Article 18.2 LIS enumerates the situations of related-party status, including the relationship between an entity and its shareholders (direct or indirect participation of 25% or more), between entities in the same group, and between an entity and its directors and board members.
- Mandatory documentation: Article 18.3 LIS establishes that related persons or entities must maintain documentation at the disposal of the tax authorities as provided for in regulations.
- Penalties: Article 18.13 LIS governs the specific infringement and penalty regime for related-party transactions, with penalties ranging from 15% to 25% of the correction made, with specific aggravating factors for non-existent or insufficient documentation.
The regulatory development is contained in Royal Decree 634/2015 of 10 July, approving the Corporation Tax Regulation, specifically Articles 13 to 16, which govern the minimum content of the master file and local file.
Secondary regulation: OECD guidelines
The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (updated in 2022) are the interpretive reference for applying Article 18 LIS, although they are not binding domestic law. The jurisprudence of the Supreme Court and TEAC resolutions recognise that the OECD Guidelines have hermeneutic value for interpreting Spanish legislation.
Most common related-party transactions in multinational groups
Intragroup loans
Loans between group companies must be documented with a formal contract specifying:
- Interest rate: must be the market rate for transactions with comparable characteristics (maturity, currency, borrower risk, guarantees). The most commonly used method is the CUP (Comparable Uncontrolled Price), which involves identifying an external comparable — Euribor or similar plus an appropriate spread — for the intragroup loan’s interest rate.
- The AEAT’s instructions on intragroup loans establish that, at minimum, the interest rate must be documented with reference to market indices at the time of signing, and the applied spread justified based on the borrower’s implicit credit rating.
- The Directorate General of Taxation has issued numerous binding rulings on intragroup loan valuation, with ruling V1867-14 being one of the most referenced for comparison methodologies.
Intangible transfers (royalties)
The transfer of trademarks, patents, know-how, and software between group entities is the most litigated area of transfer pricing. The preferred methods for valuing royalty payments are:
- CUP (comparison with comparable market transactions): requires identifying comparable licences between third parties, which is complex given that intangibles are by definition unique.
- TNMM (Transactional Net Margin Method): compares the net operating margin of the licensor or licensee entity with that of sector comparables.
- Profit Split (profit sharing): divides the group’s combined profit between related entities based on their contribution to the value creation of the intangible.
The Patent Box regime under Article 23 LIS (60% reduction of income from intangible transfers) incentivises intangible ownership by Spanish entities that have made a substantial contribution to their development, which has direct implications for the group’s transfer pricing policy.
Intragroup service charges
Services rendered between group companies (management, administration, IT, HR, financial services) must be priced with an appropriate mark-up on the cost of provision. The usual criteria are:
- Low value-adding services (as defined in the OECD Guidelines, revised Chapter VII): 5% mark-up on total cost of provision, without the need for a specific comparable analysis.
- High value-adding services (financial services, strategic advisory, R&D): specific mark-up determined through sector comparable analysis.
The AEAT pays particular attention to holding and management services that, in some groups, are used to concentrate deductible expenses in Spain without generating real economic activity in the service-receiving entity.
Business restructurings
Restructurings involving the transfer of functions, risks, or assets from a Spanish group entity to a foreign entity (exit charges) are the focus of the most intense audit activity. Article 18 LIS and the OECD Guidelines (Chapter IX) require that any transfer of value between group entities in the context of a restructuring be valued at market price, including:
- Transfer of intangibles developed in Spain to a holding entity.
- Change in the functional profile of a full-risk distributor to a low-risk sales agent.
- Centralisation of the purchasing function in a foreign group entity.
Mandatory documentation: master file and local file
Master file (Group documentation)
The master file provides high-level information about the multinational group and must include (Article 15 of the Corporation Tax Regulation):
- Group organisational chart with a description of principal entities and ownership structure.
- General description of group activities, including key markets.
- Description of group intangibles and R&D policy.
- Description of principal intragroup related-party transactions.
- Description of Advance Pricing Agreements (APAs) and cost-sharing agreements.
- Annual consolidated financial statements of the group.
Local file (taxpayer documentation)
The local file analyses in detail the related-party transactions of the specific Spanish entity (Article 16 of the Corporation Tax Regulation):
- Description of the taxpayer’s activity and position within the group.
- Functional analysis: functions performed, assets used, and risks assumed by the Spanish entity.
- Description of related-party transactions: counterparty, amount, conditions, valuation method applied.
- Comparability analysis: data and sources used to determine market price.
- Economic analysis: application of the selected valuation method and determination of the arm’s length range.
Simplified documentation thresholds
Entities with a volume of related-party transactions below €250,000 with the same related person or entity may present simplified documentation under Article 16.4 of the Corporation Tax Regulation, without the need to prepare the full local file.
Advance Pricing Agreements (APAs): maximum protection
Advance Pricing Agreements (APAs), governed by Article 18.9 LIS, allow the taxpayer to agree with the AEAT the valuation criteria for their related-party transactions for a set period (maximum four years, renewable). An approved APA is binding on both the taxpayer and the AEAT, eliminating the risk of adjustment in an audit during its validity period.
Bilateral or multilateral APAs — which also involve the tax authorities of the counterparty’s country — provide the greatest protection because they eliminate the risk of international double taxation arising from unilateral adjustments. The procedure for a bilateral APA can take two to four years, so planning must be long-term.
Country-by-Country Reporting and Pillar Two implications
For multinational groups with consolidated revenues exceeding €750 million, Spain requires annual Country-by-Country Reporting (Form 231) disclosing revenue, profit, tax paid, employees, and tangible assets by jurisdiction. This information — shared between tax authorities under the EU Administrative Cooperation Directive (DAC4) — gives the AEAT a comprehensive view of profit allocation within the group and serves as the primary risk-selection tool for transfer pricing audits.
Pillar Two (the Global Minimum Tax under Law 7/2024) adds a further layer of complexity: related-party transactions that shift taxable income from Spain to a jurisdiction below the 15% minimum rate will trigger a top-up tax in the jurisdiction of the ultimate parent, effectively reducing the benefit of the strategy and, in some cases, making the transfer pricing policy economically redundant while leaving the compliance risk in place.
At BMC our specialist tax team advises multinationals on transfer pricing documentation, APA applications, and AEAT audit defence. See our international tax services.
