How to approach a 551 general ledger account tax problem with partners and administrators in Spain

Companies use general ledger (GL) account 551s to capture the reciprocal credits between partners and administrators. The withdrawals and income in the account signify their balances as of a specific date rather than an immediate payment obligation. Debit balances are recorded in the current assets, while credit balances are recorded in the current liabilities.

Problems can arise when this GL account is used too much over a long period, causing the amount owed to the company by the partner (a natural person) to increase without recording the transaction in a loan agreement with a reasonable maturity date.

Administration reclassification

In these situations, the General State Administration is reclassifying these operations, arguing that there is a return on movable capital in the partner's name (natural person) to be included in the taxable base of personal income tax. This is based on article 25.1 d) of the Personal Income Tax Law, which defines income from movable capital as "any other income, other than the above, from an entity as a partner, shareholder, associate, or participant".

The discussion will focus on whether the company has extended a loan to the partner. As established by case law, the taxpayer (the person making the claim of the loan's existence) has the burden of proof. Thus, no loan document has been correctly submitted to the relevant tax office under the transfer tax and stamp duty (El Impuesto sobre Transmisiones Patrimoniales y Actos Jurídicos Documentados or ITPyAJD) regulations. Additionally, there is no documentation regarding the repayment period, accrual of interest or repayment guarantees. The tax authorities may use the borrowing shareholder's limited or non-existent financial capability to repay the loan as evidence to refute the existence of a loan between the parties.

Tax modifications

The expected tax modification by the tax authorities may involve either reclassifying the legal nature of the transaction (according to article 13 of the General Tax Law) or invoking article 16 of the same law if it is deemed that the transaction was simulated.

The courts have upheld some of the tax adjustments made by the General State Administration by reclassifying the legal nature of a transaction (for example, the ruling of the High Court of Justice of Asturias dated 20 September 2023, appeal 740/2023) or through simulation (for example, the ruling of the High Court of Justice of Catalonia dated 17 March 2022, appeal 3591/2020).

Therefore, it is essential to properly document any extension of the GL account with members (debit balance) over time. This means creating a loan contract and submitting it to the appropriate settlement office. The contract should clearly outline the terms, form and amounts to be repaid, including accrued interest. In addition, it should be reclassified for accounting purposes as a GL loan account and included in the annual report submitted to the Commercial Registry. This formalisation is not just a suggestion but a crucial step to avoid potential tax and legal issues.

Osborne Clarke comment

It is important to understand that the tax adjustment could affect the company and the shareholder differently, depending on the specific situation and the years under review. This might impact the company's withholdings and payments related to personal income tax on income from movable capital and require the shareholder to make adjustments in their income tax return to include income from movable capital.

Moreover, such behaviour could lead to legal consequences. In such instances, the burden of proof falls on the administration, which must disprove the presumption of innocence and demonstrate the taxpayer's guilt.