The Supreme Court Limits the Use of Transfer Pricing Against the Tax Authorities

A Ruling That Clarifies the Limits Faced by Tax Audits

The Supreme Court, in its ruling of 25 May, has overturned the position of the National High Court regarding the application of transfer pricing rules to situations that do not involve transactions between related parties.

Transfer pricing rules regulate the economic conditions agreed between companies within the same group, with the aim of preventing prices from being manipulated to shift profits to lower-tax jurisdictions. For this reason, their application is specifically limited to transactions between related entities and cannot be extended beyond that scope.

The case examined arose from a corporate restructuring in which the Tax Inspectorate considered that certain costs borne by a Spanish subsidiary should have been assumed by its non-resident parent company. To support this tax adjustment, the authorities relied on an extensive interpretation of Article 16 of the 2004 Corporate Income Tax Law, treating those costs as expenses attributable to the parent company.

The National High Court had upheld this approach, accepting that the logic of transfer pricing could justify the reallocation of those expenses. However, the Supreme Court expressly rejects this reasoning and clearly defines the scope of application of the rule.

The Supreme Court is clear: Article 16 of the Corporate Income Tax Law must be limited exclusively to related-party transactions, and its scope cannot be extended to relationships with third parties that do not have that status. Consequently, the tax deductibility of an expense cannot be denied on that basis if the expense meets the general deductibility requirements set out in Articles 10 and 14 of the same law.

For its part, the State Attorney’s Office argued that the OECD Guidelines should be applied as an interpretative criterion, claiming that a unilateral decision by the foreign parent company had generated a compensation obligation in favour of the Spanish subsidiary. The Supreme Court rejects this reasoning: a deductibility analysis cannot be replaced by an artificial reclassification based on transfer pricing where no genuine related-party transaction exists.

This ruling strengthens tax legal certainty by precisely defining the scope of the transfer pricing regime and preventing its use as a tool to adjust expenses that fall outside that perimeter.