Authorities up the pressure on fraudsters

Manuel Álvarez, Óscar Morales García.

April 2010 International Tax Review

If enacted, amendments to Spanish law will increase the penalties for tax fraud, such as a longer prison term and direct liability for companies, an give the tax authorities more time to investigate cases. However, the changes will also add uncertainty for taxpayers, explain Oscar Morales and Manuel Álvarez of Uría Menéndez.

In Spain, tax fraud is committed when the Public Treasury is defrauded. Only the individual or corporate taxpayer of each specific tax may be deemed to be the perpetrator of tax fraud. In the case of companies, the individuals who acted on its behalf are criminally liable. Amendments to several Spanish laws are being debated, which, in they enter into force, will have significant effects on these principles.

There is an intense debate among scholars and courts in Spain as to what constitutes “defrauding the Public Treasury”. Can the mere non-payment of taxes be deemed fraud? Must the business activity or transaction resulting in a tax saving clearly be swindle? Must there be an attempt to conceal the facts to be able to speak of tax fraud?

In interpreting the law on tax fraud, especially criminal law, a long-term view must be taken in the quest for legal certainty, although the context in which the law is interpreted cannot be ignored. In this regard, the current economic situation in Spain has generated a fall in tax revenue of almost 17% in 2009. In an attempt to mitigate the impact of this situation, the Spanish tax authorities have announced that they intend to increase the amount they collect in evaded taxes by 15% in 2010, without increasing human or material resources in the tax inspectorate. This means that many more tax inspections will be started, but the standard of the investigations conducted and the accuracy of the conclusions reached will undoubtedly suffer. This is the context in which the State will answer the question about what constitutes defrauding the public treasury.

The introduction of corporate liability into Spanish criminal law is one of the main proposals that will have an impact on tax fraud. As a result, companies and their directors/representatives may be found guilty of tax fraud involving VAT and corporate income tax. Legislators also plan to increase periods of imprisonment for tax fraud offences, which will also increase their limitation periods. Finally, a proposed amendment of anti-money laundering provisions seeks to establish tax fraud as a predicate offence.

Scope of tax fraud

Article 305 of the Spanish Criminal Code establishes that “he who by action or omission defrauds the Public Treasury (...) eluding the payment of taxes (...), provided that the unpaid tax debt (...) exceeds EUR 120,000.” is guilty of tax fraud.

The courts have largely interpreted the term “defraud” as the mere non-payment of a tax debt, irrespective of the specific circumstances. However, a limited number of court decisions have interpreted the term “defraud” as referring to acts of deceit or concealment with regard to criminal offences of tax evasion.

This debate acquires a new dimension in the scope of corporate tax planning. Any business activity or transaction resulting in tax savings may be performed (i) to take advantage of a protection rule to perform an unusual transaction that achieves the intended tax saving (this is known as “fraud of law”); or (ii) to simulate transactions that never took place in order to reduce or avoid taxes (this is known as “simulation”). In both cases, it has been debated whether or not the tax return filed in relation to these transactions constitutes a criminal offence of tax fraud.

This is the situation now:

Fraud of law

According to the Spanish General Tax Law, a “fraud of law” (fraude de ley, also called “conflict in the interpretation of tax law”) is deemed to exist when an apparently lawful act is carried out under the protection of a rule but with the intention of achieving an illegal outcome.

The main features of a “fraud of law” can be summarised here:

  • The fraudulent transactions must be real, that is, they must be actually carried out.
  • There must be a rule that legalises the transaction (protection rule).
  • Another rule must be avoided as a consequence of the protection rule.
  • The aim of a “fraud of law” is to avoid a tax burden as opposed to breaching the law.
  • If the tax authorities consider that there is a “fraud of law”, the evaded rule, plus the applicable default interest, must be applied to regularise the situation.


Pursuant to the General Tax Law, an unlawful simulation of an act (simulación) exists when the parties do not intend to carry out a real transaction (i.e. there is no reason or substance to the transaction). Simulation also implies deception or malicious concealment in order to prevent the tax authorities from knowing the real facts and legal/tax consequences of a transaction. There are two types of simulation: (i) when the simulated transaction (negocio simulado) does not correspond to a real business -“absolute simulation”- and, (ii) when the simulated transaction does not correspond to the parties’ real purpose.

The main features of a simulated transaction can be summarised here:

  • A tax is not paid as a result of the application of the tax rule to the simulated transaction.
  • If the tax authorities consider that there is a “simulation”, the regularisation will consist of the application of the real rule applicable to the real transaction, with the applicable default interest and tax penalty.

Therefore, where the unpaid tax debt exceeds €120,000 after applying the real rule, it must be determined whether this only results in criminal liability in cases of simulation or also in cases of fraud of law.

Until 2005, the Spanish Supreme Court and provincial courts held that the term "defraud" in article 305 of the Criminal Code included both fraud of law and simulation as criminal conduct in tax fraud. This broad interpretation put companies’ tax planning strategies under extraordinary pressure: transactions performed in fraud of law were also deemed tax fraud offences when the tax saving was more than €120,000.

However, in judgment 120/2005, the Constitutional Court held that the term "defraud" in article 305 of the Criminal Code did not include cases of tax evasion deriving from fraud of law. The Constitutional Court highlighted that the essential characteristics of fraud of law, irrespective of its nomen iuris (“fraud”), are the economic justification of the transaction performed by the taxpayer and the very existence of the transaction itself, although it may be unusual. The Constitutional Court held that fraud of law (as a way of avoiding paying tax) is incompatible with the concept of “defrauding” contained in the criminal offence set forth in article 305 of the Criminal Code.

According to this decision of the Constitutional Court, there is no doubt that a simulation of a transaction, operation or legal act with the purpose of avoiding the payment of more than €120,000 in tax is tax fraud pursuant to article 305 of the Criminal Code. Furthermore, on the basis of judgment 120/2005, the Constitutional Court has confirmed that fraud of law does not constitute a criminal offence as it does not contain elements of deception or concealment of facts.

After this milestone judgment, the legal interpretation of the offence of tax fraud should be clear and straightforward. However, in practice, the difference between simulation and fraud of law is not as clear as it conceptually appears. There is a significant risk that transactions traditionally deemed to be a fraud of law by the tax authorities are now classified as a simulation with the aim of allowing criminal prosecution. A clear example of this trend may be seen in Spain with regard to the tax planning of international groups involving debt push-down structures. In these cases, the Spanish tax authorities are trying to classify the debt structures as simulated transactions and, as a result, start criminal prosecutions as a way of significantly increasing the tax collected.

Next steps in prosecution

The prosecution of tax fraud in Spain will be made easier in the coming months thanks to two amendments to the Criminal Code and the Anti-Money Laundering Law, which are pending legislative approval.

Amendment of the Criminal Code involving tax fraud

On 23 November 2009, the Spanish government sent a draft bill amending the Criminal Code to the Congress. This bill includes a fundamental reform that affects more than 100 articles of the current Code. Its purpose is to transpose several international conventions, EU directives and framework decisions into Spanish criminal law.

Tax fraud is affected by these three modifications:

Introduction of corporate liability into Spanish criminal law.

Until now, one of the main principles of Spanish criminal law was, and still is, “societas deliquere non potest”, which means that companies cannot commit a crime. When a crime attributable to a company is committed, the individuals who acted on its behalf are held criminally liable. Meanwhile, the company itself is held jointly and severally liable for the fines imposed on the individuals and vicariously liable for the civil damage resulting from the offence.

The amendment being debated will do away with this principle and introduce corporate liability into Spanish criminal law. These are the main features of the proposed amendment:

  • A company will be held criminally liable if a crime is committed on its behalf (or in its name) and for its benefit (as occurs, generally, in cases of corporate tax fraud).
  • The criminal liability of the company will not exclude the criminal liability of the individuals who acted on its behalf, and vice versa. If the individual in question cannot be found liable (e.g. because of mental illness, death, etc.), the company can still be held criminally liable.
  • Individuals and companies will have separate legal defences and strategies: specific rules excluding or mitigating criminal liability will be established for companies and individuals. In the case of companies, the rules are broadly based on whistleblowing and voluntary admissions of guilt (e.g. confessions, disclosure of evidence).
  • Companies may be punished with fines, activity suspension, closure of premises, business bans, company dissolution, etc.

Tax fraud offences are usually committed for the benefit of the company itself. If the proposed amendment is enacted, both the company and its directors or representatives may be held criminally liable as perpetrators of the tax fraud. Bearing in mind that they may have different, and, in some cases, contradictory, defences, it seems likely that conflicts of interest will arise as the company’s best legal defence may not be compatible with the individuals who acted on its behalf being found innocent.

Tougher penalties for tax fraud offences.

The amendment to the Criminal Code increases the period of imprisonment from between one and four years to between one and six years. This new penalty will modify the classification of tax fraud, which is currently deemed a less serious offence (since the penalty is less than five years), as a serious offence. This increase in criminal punishment should be aimed at reinforcing general deterrence, however it does not seem to be the legislators’ main aim. Instead, the tougher penalty mainly seeks to give the authorities longer to investigate and prosecute tax fraud offences.

New limitation period for tax fraud offences.

The new classification of tax fraud as a serious offence will have a collateral sought effect on its limitation period.

Pursuant to article 131 of the Spanish Criminal Code, less serious offences have a limitation period of five years, while for serious offences it is ten years. Thus, the new limitation period for tax fraud offences will be ten years.

The tax authorities have four years to claim (or collect) unpaid tax debts in administrative proceedings. In the case of tax fraud, the limitation period for criminal prosecution is five years. This one-year difference is currently creating serious inconsistencies. For instance, the spontaneous filing of returns and payment of the defrauded tax by the taxpayer before it is formally notified of the existence of a tax inspection or criminal prosecution (“tax regularisation”) excludes criminal liability. It would be logical for this possibility to exist throughout the five-year period of the limitation period. However, the criminal courts think that, since the tax authorities are not entitled to collect these amounts after the fourth year (their right is time-barred), the taxpayer is not allowed to regularise its tax status with full effects in the fifth year (i.e. filing a new tax return without actually making payment will not exclude criminal liability).

If the proposed amendment comes into force, these inconsistencies in cases of tax fraud will multiply, since the administrative limitation period will differ by six years from the criminal limitation period of 10 years.

In addition, the new limitation period will force companies to keep documentation for 10 years and further complicate their tax planning, as it may be reviewed up to 10 years after it is designed and implemented. This means that the legal parameters in place when the tax planning is analysed may be completely different to those that existed when the tax plan was devised. This will create significant legal uncertainty (as explained above).

Anti-Money Laundering Law amendment

The Spanish Criminal Code punishes the laundering of money or proceeds of a criminal offence (the “predicate offence”). There is much debate in Spain as to the concept of “predicate offence” as regards tax fraud offences. The majority of criminal courts, contrary to the approach of the Spanish tax authorities and public prosecutors, tend to exclude money derived from fraudulent tax savings from the scope of money laundering: the unpaid tax debt is a premise for a tax fraud offence, not the result of the criminal offence, so that the fraudulent tax savings cannot be deemed to be proceeds of a crime.

On 27 November 2009 the Spanish government sent a draft bill on the amendment of the Anti Money Laundering Law to Congress. The bill adds sixty-one new articles to the legislation (the Anti Money Laundering Law currently has 16 articles), which transpose EU Directive 2005\60\EC into Spanish law.

Article 1 of the bill of amendment defines the proceeds of a crime for money laundering purposes. The definition expressly includes fraudulent tax savings as proceeds of a crime (going beyond the terms of the definition proposed by EU Directive2005\60\EC), and establishes tax fraud as a predicate offence of money laundering.

If this amendment enters into force, the deterrent effect of the state’s punitive tool for the prosecution of tax fraud will increase exponentially. Both tax fraud and the subsequent money laundering may be prosecuted in the same criminal proceedings (as currently occurs in cases of drug trafficking before the Spanish courts). Thus, suspects in these cases may face very serious imprisonment penalties, since the penalties for money laundering will be added to the penalties for the tax fraud.

A path will also be opened to the Spanish courts prosecuting tax fraud and related money laundering offences to gather economic and financial information from suspects (either individuals or companies) located in foreign countries where the double incrimination principle only applies to money laundering, not to tax fraud.

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