Spain: Examination of new administrative principles on conflicts in the application of tax provisions and sham transactions

In a judgment dated July 2, 2020 (appeal 1429/2018), the Supreme Court examined in detail the “classification,” “conflict in the application of tax provisions,” and “sham transactions” rules set out in articles 13, 15, and 16 of the General Taxation Law (LGT). As we summarized in our publication dated September 28, 2020, according to the court (i) the classification rule allows the legal nature of the taxable event that actually occurred to be established, regardless of the form given by the parties, (ii) the conflict in the application of tax provisions rule requires avoidance of the taxable event through artificial transactions, if they have irrelevant legal or economic (but not tax) consequences; and, (iii) under the sham transaction rule, the taxable event is the one actually carried out by the parties. The main significance of this judgment is that the court concluded that these rules cannot be interchanged. One or the other must be applied (and the relevant procedure implemented) depending on the circumstances of each case.

By contrast, in its decision of January 28, 2026, TEAC appears to allow a specific transaction to be classified as a sham even though, strictly speaking, the elements characteristic of a conflict in the application of tax provisions are present. The examined transaction involved an individual resident in the United Kingdom, who was a 60% shareholder in a Spanish resident entity (company A) and transferred their ownership interest in that company A to a second entity (company B) resident in Cyprus. Immediately after this transfer, company A distributed a dividend, on which no tax was withheld as allowed by applying the Cyprus-Spain tax treaty. Tax auditors took the view that the transfer of shares from company A to company B, resident in Cyprus, was carried out to secure application of a more favorable treaty and was therefore deemed to be a sham transaction.

TEAC pointed out that the sham transaction and conflict in the application of tax provisions rules are general anti-abuse clauses created by the legislature for the correct application of tax laws, although it added that, although they share the same purpose, they have different meanings and scopes, and therefore are not interchangeable, which requires the tax authorities to determine which anti-abuse rule should be applied in each case. Based on that analysis, it examined whether the existence of artificiality in legal transactions, together with the only purpose of obtaining lower taxation, preclude the existence of a sham transaction because these elements characterize a conflict in the application of tax provisions. It concluded that a sham transaction may involve either the appearance of a non-existent transaction (absolute sham) or the presentation of a transaction other than that actually carried out (relative sham). Consequently, the existence of artificiality and an exclusively tax-related purpose do not, in the court’s view, in themselves preclude the finding of a sham transaction. The determining factor is a potential discrepancy between the parties’ actual intentions and their stated intentions, which must be assessed as a question of fact and for in each specific case, based on its circumstances.

In new reports published on conflicts in the application of tax provisions (20, 20 bis, 20 ter, and 20 quater) in February 2026, the Consultative Committee on Conflicts in the Application of Tax Provisions finds that transactions to purchase treasury shares (which are taxed as income subject to personal income tax for the shareholders, reduced by the applicable reduction coefficients), followed by a subsequent capital reduction, may amount to a conflict in the application of tax provisions. The committee said that the formal splitting of the transaction into two phases (first, the company’s acquisition of its own shares, and then, the capital reduction with repayment of contributions) is an artificial “detour.” In this context, the “usual or proper” transaction is a capital reduction with repayment of contributions, in which the obtained income must be classified as income from movable capital.