Spain: Transfer pricing rules cannot be used to deny the deduction of labor costs related to a restructuring

The Supreme Court has delivered a highly significant judgment in relation to related-party transactions. Namely, judgment 631/2026 of May 25, 2026, overturning the appealed national appellate court judgment, with respect to the part relating to deduction of restructuring costs arising from the closure of certain manufacturing plants in Spain. The examined case concerned a Spanish subsidiary of a multinational group that had closed those plants. Within the group, this subsidiary operated as a low-risk manufacturer. As a result of the closure, the Spanish entity had incurred expenses, including the costs of laying off employees, which the tax authorities did not allow to be deducted. The tax authorities’ view was that, considering the subsidiary’s functional profile (its only customer was the group), unconnected parties would have provided for an amount of compensation or indemnification for termination of the manufacturing contract. Because this had not been done, they denied deduction of the expenses. The National Appellate Court concluded that the costs of closing the factories should have been borne by the group rather than by the Spanish manufacturing company, because their closure was part of a group-wide strategy to shift production to low-cost countries.

The Supreme Court reframed the debate and held that the preliminary issue is not so much whether the group made the strategic decision to close the factories, but rather whether Spanish transfer pricing rules can be used to deny deduction of the expenses in question.  Its conclusion was solid: article 16 of the revised Corporate Income Tax Law in force at that time (currently article 18 of the law) regulates related-party transactions, and therefore cannot be applied to legal relationships with third parties which are unconnected. Furthermore, the OECD Transfer Pricing Guidelines cannot be used either on their own to deny the deduction of an expense if there is no related-party transaction to which a pricing rule established for this type of transactions can be applied. In the court’s own words, relying on the guidelines presupposes that we are dealing with related-party transactions.

Under this reasoning, the court concluded that the expenses incurred in this case must be held deductible. Besides not stemming from a related-party transaction, the expenses were incurred in respect of collective layoffs, validated by the competent labor authorities, paid by the Spanish entity, and recorded in its financial statements for the relevant fiscal years. They therefore meet the requirements for deduction, and there is no legal obstacle to their deduction for tax purposes. 

In short, the court criticized the tax authorities for altering, under the guise of adjusting related-party transactions, the subjective and objective elements of legal relationships between third parties. According to the court, if the tax authorities intended to reconstruct or reclassify legal relationships with third parties, they should have used, where relevant, the general provisions of articles 13, 15, and 16 of the General Taxation Law (LGT).