On 28 January 2026, the Spanish Central Economic-Administrative Tribunal (TEAC) issued a unification decision (00/09964/2023/00/00) that clarifies, in unequivocal terms, the legal boundary between two distinct anti-avoidance doctrines that have long troubled cross-border tax planning. The decision addresses the relationship between simulation of transactions under Article 16 of the Spanish Tax Law (Ley General Tributaria (LGT)) and abuse or conflict in the application of tax law under Article 15 LGT.
For internationally mobile individuals and corporate groups with Spanish operations, the implications are immediate and far-reaching. The decision closes a defensive strategy that has become commonplace in Spanish tax disputes, and it does so in a manner that shifts the burden squarely back onto taxpayers to demonstrate economic substance.
Two Doctrines, Two Very Different Consequences
Spanish tax law provides two principal mechanisms for challenging transactions that appear designed primarily to reduce tax liability. Understanding the distinction between them is not academic. It determines the procedure that must be followed, the evidential burden, and critically, whether penalties apply.
Simulation under Article 16 LGT operates where there is a divergence between the true intention of the parties and the transaction formally declared. In its absolute form, simulation exists where the parties create the appearance of a transaction with no genuine intent to perform it. In its partial form, the parties intend to enter into one type of transaction but formally execute another.
Simulation does not require a special administrative procedure. The tax authority may challenge the transaction directly during an inspection. Penalties are readily available. The focus is on whether the declared legal form corresponds to the underlying economic reality.
Abuse of law under Article 15 LGT, by contrast, presupposes genuine and effective legal transactions. The doctrine applies where taxpayers exploit ambiguities, gaps, or technical constructions in tax legislation to achieve an outcome that is inconsistent with the legislative intent. The transactions themselves are real. They are simply used in an improper manner.
Crucially, the abuse of law provision requires a special procedure. The tax authority must obtain a binding report from the Advisory Commission before recharacterising the transaction. Penalties may only be imposed if the case substantially resembles a previous adverse determination that was public before the tax return filing deadline. The procedural safeguards are significant.
The TEAC Draws a Clear Line
The January 2026 decision aligns with recent Supreme Court case law and establishes several critical principles.
- First, artificiality and tax-saving motives do not, by themselves, require recharacterisation as abuse of law. Many taxpayers and advisers have operated on the assumption that if a structure is artificial and motivated primarily by tax considerations, it must fall within Article 15 LGT. The TEAC rejects this view. Artificiality does not preclude the existence of simulation. Indeed, artificiality is often evidence of simulation.
- Second, simulation may exist even where the interposed entity legally exists and the acts are formally documented. The fact that a transaction is executed through legally valid instruments, recorded in notarial deeds, and supported by corporate resolutions does not, in itself, defeat a simulation challenge. The decisive factor is whether those instruments reflect the true economic intention of the parties.
- Third, there is no automatic or mechanical classification. The legal characterisation must follow a substantive analysis of the facts and evidence in each individual case. Tax authorities cannot apply the simulation rule simply because it is procedurally more convenient. Equally, taxpayers cannot invoke the abuse of law framework to shield transactions that lack genuine economic substance.
The End of a Common Defense Strategy
For taxpayers facing aggressive tax planning challenges, the decision has immediate tactical significance. It closes a defensive line that has become common in Spanish tax litigation.
In recent years, taxpayers subject to simulation challenges have sought to reframe the dispute as one involving abuse of law. The argument is straightforward. The transactions are real. They are legally effective. If the tax authority believes they are improperly motivated, it must follow the special procedure under Article 15, obtain a report from the consulting commission, and comply with the penalty restrictions.
Although the abovementioned may arise in the context of abuse of law, it may also occur in the context of simulation. The TEAC’s decision states that, to the extent that the intermediary person actually exists and effective execution of a legal transaction is carried out, the interpretative debate will move away from the sphere of absolute simulation, but without this allowing, per se, the possible existence of relative simulation.
The TEAC’s decision makes clear that the abuse-of-law strategy will not succeed where the taxpayer cannot demonstrate genuine economic substance. If there is a divergence between the declared transaction and the underlying economic reality, the fact that the transaction is technically valid does not transform it into a genuine transaction for the purposes of Article 15.
In other words, formal structure offers no protection without real substance. Taxpayers cannot use the procedural protections of the abuse of law framework to shield transactions that are, in substance, simulations.
What Substance Means in Practice
The TEAC’s emphasis on substance is consistent with broader international trends, but its application in the Spanish context has particular features that UK-based taxpayers and advisers must understand.
Substance is not determined by reference to a checklist. It is a question of fact, assessed holistically. The following factors are typically relevant, though not exhaustive.
Does the interposed entity have economic or commercial rationale independent of the tax benefit? Are decisions made autonomously or are they directed by another party? Is there genuine assumption of risk? Are there employees, premises, and operational infrastructure commensurate with the declared activity?
Spanish courts and tribunals have shown increasing willingness to disregard formal arrangements where the economic reality points in another direction. This is particularly acute in holding company structures, intra-group financing arrangements, and intellectual property licensing.
The Cross-Border Dimension
For UK nationals and corporate groups with Spanish operations, the decision reinforces the need for careful planning at the outset. Spanish tax inspectors are equipped with extensive information exchange powers, access to beneficial ownership registers, and increasingly sophisticated data analytics.
Structures that may appear defensible under a purely technical analysis are unlikely to survive scrutiny where the underlying substance is absent. The TEAC decision makes clear that Spanish tax law will not tolerate form over substance, regardless of the sophistication of the legal instruments employed.
This is particularly relevant for taxpayers who have historically relied on treaty protection, holding company regimes, or participation exemptions. Those benefits are only available where the underlying transactions are genuine. If the transaction is recharacterised as a simulation, treaty protection falls away entirely.
Practical Implications Going Forward
The decision has several immediate practical consequences for internationally mobile taxpayers and corporate groups operating in Spain.
First, any structure that involves interposed entities, intra-group transactions, or cross-border financing should be reviewed to ensure that genuine economic substance exists. This is not simply a question of documentation. It requires operational substance, commercial rationale, and genuine assumption of risk.
Second, taxpayers subject to ongoing inspections should expect increased focus on the distinction between Articles 15 and 16. Spanish tax inspectors are likely to rely on the January 2026 decision to justify simulation.
Third, the decision underscores the importance of contemporaneous documentation. Where substance exists, it must be evidenced. Board minutes, commercial correspondence, risk assessments, and operational records are critical. Spanish tribunals will not infer substance from silence.
Del Canto Chambers’ Perspective
At Del Canto Chambers, we work with HNW individuals and corporate clients navigating the intersection of UK and Spanish tax law. Our dual-qualified expertise allows us to anticipate how structures will be viewed by both HMRC and the Spanish tax authorities, particularly in cases where substance and form diverge.
The TEAC decision is a reminder that aggressive tax planning, whether domestic or cross-border, is subject to increasing scrutiny. The legal threshold for simulation is lower than many taxpayers assume, and the procedural protections available under the abuse of law framework are not available where substance is absent.
For clients with existing Spanish structures, this is an appropriate moment to conduct a substance review. For those considering new arrangements, the decision confirms what has always been true in practice. Substance is not optional. It is the foundation upon which defensible tax planning rests.
Compliance Is More Than Filing
Tax compliance is not a one-off act of submitting a return. For cross-border clients, it is an ongoing process of checking that the facts on the ground still support the position taken on paper.
That means regular audits and reviews of existing tax schemes, governance, and operational reality, particularly where interposed entities or intra-group arrangements are involved. Under the principle of substance over form, a structure that was defensible when it was implemented can become vulnerable if the commercial rationale fades, decision-making is not genuinely exercised, or activity and risk do not align with the legal documentation.
If you are subject to a Spanish tax inspection or are concerned about the substance of your existing arrangements, our team can provide tailored analysis and representation. The landscape has shifted. The time to act is now.
