Antonio Flores’ Blog

Setting up a Spanish Limited Company is a relatively straightforward process. In fact, many investors who are looking to start a business will immediately think of the colloquially known as “S.L. company”, formed via a notarial deed of company incorporation. And for many too, that’s about as knowledgeable as they get with these type of business structures.

Below is a list of “must knows” for any S.L. owner or director:

S.L.s are not devised for one-man bands: The Spanish Hacienda, whilst accepting that an S.L. is a legitimate form of conducting business, will not accept those that lack an infrastructure to carry out the commercial or professional activity -whether human or material resources (staff, office etc.)- e.g. people who work from home. These companies are described as “dummy” or “shell” companies and operating through them could be challenged by the Tax Office. This is the case too with services where the company could not exist without the founder: think of medical doctors, dentists, singers, elite sportsmen and women etc.

S.L.s cannot be “closed down”: I typically hear of people talk about closing a company down when debts become insurmountable. A company can only be closed if there are no debts; if there are, the director is obliged to file for bankruptcy within two months after it becomes insolvent, at the Courts.

High vs low share capital: Unless you are looking to show financial credibility with your potential clients or lenders, shareholders and directors should go for a lower share capital; the lower this figure is the less they will be personally responsible for. But this has downsides too: if a company has a net worth below 50% of the share capital, it is technically insolvent, being a legal ground for forcible wind up.

An S.L. is not a personal piggy bank: Company money and personal money are separate, no matter how much we try to try to stretch it; logic and common sense must prevail here. Here are some tips of what is deductible and what not: shopping list (if consumed by the business), clothes (only if they have a logo or anagram of the S.L.), vehicles and petrol linked to the S.L., business meals (up to 1% of the net income of the S.L.). Not deductible are holidays, new home kitchen, kids schools, etc.

Antonio Flores Companies, Corporate Law Companies Spain, sociedad limitada, spain S.L., Spanish Limited Company

Less than a week has passed since we learnt that Emilio Cuatrecasas, owner of the largest fiscal advisory firm in Spain, just hired former Deputy Prime Minister Soraya Saenz de Santa María. In 2015, Mr. Cuatrecasas pleaded guilty to 8 counts of tax fraud in exchange for a rather lenient 2-year suspended imprisonment -suspended- conviction agreed with both the Prosecutor and the State Lawyer, the latter working on direct instructions of Mrs. Saenz de Santa María, when the PP party was in power.

What’s interesting of this case -besides the fairly obvious connection between Mr. Cuatrecasas’ favourable Court ruling and the hiring of the instigator of such advantageous outcome- is the nature of the tax fraud: deducting personal outlays as company expenses. In this case, it was done in a grand scale where, for example, servants hired for his personal residences or his privately used yacht, electrical appliances, decoration and generally, maintenance of his personal assets, were all introduced in the company balance sheet as deductible expenses. In the end, Mr. Cuatrecasas had to pay over 3 mm Euros plus 1 mm Euro in interest to avoid doing jail time.

Spain is no different from any other country when it comes to tax deductible expenses. But what are they? Broadly speaking, they are those deemed helpful and appropriate for a business, as well as necessary and reasonable. More specifically, this what the law says:

Deductible expenses: employes salaries and social security, rentals (office or part of a home used to work from) and associated expenses, equipment and supplies, repair and maintenance, stationery, external advisors, VAT (where it is not claimed) and uniforms not susceptible of private use, to name a few. Vehicles not exclusively used for business purposes will be deductible on prorate, with a maximum of 50% (save for cargo, transport and similarly used vehicles which will be 100%). Travel expenses, meals (maximum of 1% of turnover) or Christmas presents can be deducted if they are associated with business and this can be proven when required.

Non-deductible expenses: Director’s salaries, dividends, fines, services provided by providers based in a tax haven, guard dogs, clothes (including lawyer’s suits), parfums, beauty treatments, sunglasses or mobile phones (where it is no possible to show that they are exclusively used for a business purpose), weddings, weekly “Mercadona” personal shopping and many other non-expenses habitually picked up by tax inspectors.

Finally, deductible expenses must be provable by means of regular or simplified invoices, as mere receipts will not be valid.

Antonio Flores Corporate Law, Tax Law company expenses, Corporate deductible expenses, spanish company accounting

For the first time that we are aware of, a Spanish Court has found a complaint to sufficiently allege a breach of fiduciary duty against a bank, Santander, who had opened an account to an unauthorized financial investment company and allowed it to take clients’ deposits for unregulated investments. Needless to say, clients’ money was almost all lost.

According to the Madrid Appeal Court, (…) the unauthorized firm acted illicitly by breaching is contractual terms with its clients and more importantly, the Court deemed this firm was (…) offering the public an investment service in blatant violation of mandatory regulatory laws.

The directors of the unauthorized have also been found to have acted illicitly –for the above reasons- and as a result, deemed personally responsible for the losses of clients’ savings.

And Santander, more crucially, was found to have (…) acted reprehensibly by allowing the unauthorized firm to operate freely by opening bank accounts, authorizing transfers and permitting other typical banking transactions reserved to authorized firms.

The Court invoked article 7 of the annex to the Financial Markets Code of Conduct that prohibits dealings with illegal companies:

Entities will refuse any operation from non-authorized intermediaries, as well as those in which they have knowledge that the relevant legislation applicable to the former may be infringed.

Such “knowledge” was decisive in this case for the Court to rule that Santander was in breach of the above obligation and order the bank to indemnify the client for the losses sustained by the boiler room.

This events leading to this ruling happened prior to the approval of the Anti-Money Laundering Act where banks –and other obliged parties-, are obliged to obtain information as to the

“purpose and expected nature of the business connection of the client and in particular, the nature of the professional and/or business activity, carrying out those measures to reasonably prove the information” (art. 5),

as well as a

“continuous follow up of such business connection, inclusive of scrutiny of any dealings conducted throughout the relationship” (art. 6).

On this basis, we believe that the above “knowledge” is no longer essential and therefore banks that facilitate any person, company or otherwise to illegally operate in the financial markets could be deemed responsible for the losses sustained by their clients/victims.

For the avoidance of doubt, an unauthorized entity (or “fly-by-night operation” as described by Spanish regulators) is any such that offers investment or insurance services and is not approved by the CNMV (Financial Conduct Authority) or the DGS (Insurance Regulator).

Antonio Flores Companies, Corporate Law, Scams Banks financial investments, fiduciary responsibility banks, IFA Spain, Illegal investment, spanish boiler rooms, unathorised IFA

Much has been written about unregulated IFAs operating in Spain. In 2012, The European Commission was considering setting up an ombudsman to help expat victims reclaim against these firms and the Spanish regulators -the CNMV (financial investment) and the DGS (insurance) – regularly post warnings about unregistered operators.

The CNMV is particularly proud of its achievements in the supervisory arena. Its website boasts the following: “Spain enjoys a modern, efficient regulatory and surveillance system, but we must continue working to perfect it. Our regulatory and surveillance system is among the most advanced in the world, and the CNMV is determined to maintain its quality.”

Whatever the surveillance system the CNMV is working on to perfect, its methodology has failed to prevent the activities of not just unregulated IFAs but also, unauthorized insurance companies.

Let’s take the example of Old Mutual (former Royal Skandia), a FTSE100 company “overseeing 319.4bn assets under management for more than 16 million customers worldwide (as at 30 September 2015).”

In Spain, Old Mutual operates via the companies Old Mutual International Life Ireland Limited (Dublin) and Old Mutual Wealth Life & Pensions Limited (Southampton), the only group companies authorized by the DGS. On the Costa del Sol, Old Mutual is known for it has been offering a life assurance policy called “Executive Investment Bond” (EIB), a bond that has incidentally lost millions to investors.

Yet for some reason, the EIB is being offered in Spain through IFAs by Old Mutual International Isle of Man Limited, a standalone company registered in the IOM but not ‘passported’ -meaning not registered in regulatory jargon- into Spain to offer any product, whether insurance or financial. And the same applied to its unauthorized predecessor Royal Skandia Life Assurance Limited (based in IOM), which too offered the “Executive Investment Bond”.

For its part, article 4.2 of the 2004 Insurance Supervisory Act states the following:

Insurance contracts and other legal arrangements subject to this law signed or agreed with an unauthorized entity, or an entity whose authorization was revoked, will be null and void. A person that having entered into a contract with it will be under no obligation pay the premium and will have a right to obtain a refund of any paid premium.

Corporate lawyers are always quick to point out that registered entities forming part of a group of companies are autonomous and separate from each other, regardless of whether they share common brand or names. To this extent, Old Mutual Isle of Man (and Royal Skandia Isle Of Man) should have been registered in Spain and where not, all of its contracts could be null and voided by Spanish Courts.

Antonio Flores Companies, Corporate Law

Companies that regularly advertise are under the impression that, if you insert a disclaimer at the bottom of the ad, you are fully covered. This recurring mistake and a few others can have very serious implications, more so considering that an ad forms part of the contract; let us see some of them.

• Clause “advertiser is not responsible for pricing errors or misprints”: This is a clause prima facie deemed abusive and therefore void. The most cited example is the woman who received a printed offer for a luxury car that, although retailed for €45k, had a price tag of €9k. The ruling held that the advertiser had not rectified in any form and granted the claimant the right to the car for the advertised price.
• Clause “valid whilst supplies last”: this clause is only accepted in season sales or, generally, provided the consumer is able to establish the size and duration of those supplies. The aim of ruling on its illegality is to avoid a supplier’s prerogative to cease selling a product, at an attractive price, at their sole discretion.
• Representations made on brochures: Brochures do have a contractual binding force. A Marbella based property developer, Erasur S.L., was forced by the Supreme Court (12/7/2011) to return 205k to buyers who, having relied on advertised representations of sea, golf and mountain views, bought an apartment that ended up having only mountain views. The Court found that the brochure was not a mere “invitation to negotiate” but a contractual offer for an off-plan apartment.
• Responsibility of editors for publishing misleading ads: In a recent ruling, multinational Hachette Filipacchi was found co-responsible of misleading advertising for hosting an ad for a miraculous slimming product later found to be deceitful (aren’t they all?). Although they were acquitted in the first instance, the Courts applied article 34 of the Unfair Competition and Advertising Act 29/2009 ordering them to cease and to refrain from hosting identical advertising.
• Clause stating a “limitation of liability for losses sustained as a result of relying total or partially on this product”; this clause, shocking as it may sound, was inserted in a brochure issued by a Danish bank that gave Inheritance Tax advice, and wish to now get away with it once the Spanish “Hacienda” has concluded it is fraud. The fate of the clause can be explained by reference to the law on the matter:

Consumer Protection Act, Article 130: Inefficacy of limitation or exoneration of liability clauses: clauses limiting or exonerating from responsibility in respect of instances of civil responsibility under this Act are not applicable and thus, inefficacious.

Antonio Flores Companies, Corporate Law Advertising law Spain, COnsumer Protection Laws Spain, litigation rental contracts, Marketing in Spain, Misleading advertising

If I say that Spain is –undeniably- a country in love with bureaucracy, your response will be: “really…I don’t believe you for a minute?!” Sarcasm is rarely better suited to a statement that here.

Yes, unfortunately a good proportion (not all) of the 2.7 million Spanish civil servants need to move paperwork around to justify their jobs and that includes the Spanish “Hacienda”. However, these last ones seem to be getting better all the time and one example is the clampdown on tax loopholes on buying shares of a property owning company, even considering the exasperatingly confusing layers of new amendments.

Let’s take an example of article 108 of the Stock Exchange Act, a precept devised to prevent Spanish property buyers from using companies to circumvent the payment of transfer taxes. The wording of the article, modified at least 6 times since 1989, has given food for thought to judges, lawyers, tax advisors and notaries who, in very intellectually dense interpretations of what the lawman really meant to say, ended up more confused than before (getting many hundreds of property buyers into trouble in the way).

Simply put, this article regulated a general exemption of Spanish VAT, Transfer Tax and Stamp Duty for the transfer of securities of companies that held real estate assets. Back in the nineties, the article regulated on the scope of the exemption of payment of taxes if you bought property via the shares of a company and it talked about not acquiring more than 50% of the share capital of a company whose balance sheet was made up by, in at least 50% of it, Spanish real estate.

So many people, ensuring they bought equally with a partner of friend, got away with this and bought property free from transfer taxes, much to the despair of the Tax Office. In a new twist, the lawman introduced a new condition: that 3 years would have to pass between the time of transfer of the property into the company and the sale of shares (to avoid purpose-made company incorporations).

Not being enough, new amendments were introduced but primarily, they came up with one definitive concept: that it was presumed that if any of the above were met, one was trying prima facie to cheat the Spanish Hacienda.

And to close the loop, they introduced the final amendment whereby provided the property was being used for an economic or professional activity, transfer tax will be applied because it is presumed (subject to rebuttal) that one is trying to buy a home and pay no taxes (pretty practical here!).

In conclusion, a no-go area for potential tax-avoidance adventurers.

Antonio Flores Corporate Law Sale of shares Spanish S.L., Spanish Limited Company, Spanish taxes sale of company, Transfer Tax Spanish Company

If there is a word that I am never comfortable with when advising clients, in law, is ‘watertight’. I often hear the adjective in front of `legal case´, `contract´, `lease agreement´, `terms´ or even, just recently, a firm called Watertight Legal. Let’s now focus on how non-watertight can certain contracts be, in particular Consumer contracts.

Spanish contract law operates the principle of “libertad de contratación”. This means that parties to contracts are allowed to agree on the terms of a contract so long as they do not violate public policy, ethics/morals or the consumers’ rights, and they conform to special legislation that may exist pertaining to the activity i.e. banking, insurance etc.

Surprisingly, employing the best lawyers to draw up contracts is sometimes a recipe for disaster: banks, insurance companies and other large operators have found out, to their horror, that contracts drawn up by the most expensive law firms their money can pay are riddled with (loop)holes like a Swiss cheese.

The examples below come to show what can happen with supposedly watertight contracts (and terms), when challenged in Court:

• Madrid Courts declare at least 45 clauses in banking contracts null and void as they breach Consumer protection regulations (6-9-2013).
• Supreme Court voids 8 clauses found in contracts with insurers Allianz, Caser and Mapfre (1-7-2010).
• Madrid Court rules that 8 clauses in Ryanair contracts must be removed because they are unfair, such as charging €40 for a boarding pass (23-10-2013).
• Costa Cruceros, the cruise liner operator (and owner of the infamous Costa Concordia sinking) agreed to remove 7 clauses off its contracts.

In my experience it is everyday practice, and not some lawyer’s intuition, excessive self-belief in his abilities or the firm he works for, what will help identify clauses (or even the contract) prone to be successfully challenged. That, and articles 82-90 of the Consumer Protection Act that has blacklisted no less than 30 unfair contract terms.

Antonio Flores Corporate Law Abusive Clauses spain, Contracts Spain, Spanish consumer laws, Spanish Contract Law

According to Wikipedia, trusts arise where one person (a “settlor”) gives assets (e.g. some land) to another person (a “trustee”) to keep safe or to manage on behalf of another person (a “beneficiary”). In other words, formal vs. beneficial ownership.

Spain does not have, in general terms, such an institution and therefore it is not recognized.  However, a resident of Spain who sets up a trust abroad (and its heirs and beneficiaries) will be subject to Spanish taxes, pursuant to the findings of 2 rulings issued by the Spanish Directorate of Taxes (DGT) that conclude as follows:

• Setting up a trust is not subject to Transfer Tax.
• Income Tax: as the settlor continues to be the owner of the assets transferred to the trust -as far as Spain is concerned-, income taxes apply normally.
• Wealth Tax: as above, the settlor is subject to wealth tax on the net value of his/her worldwide assets and rights. However for 2013, Wealth Tax is not applicable.
• Gift Tax: transfers made from trusts to beneficiaries during the life of the settlor are subject to Spanish Gift Taxes provided the former is a Spanish tax resident or where not, if the assets and rights gifted are based in Spain, could be exercised or should be carried out in Spain.
• Inheritance Tax: transfers made from trusts to beneficiaries/heirs on death of the settlor are subject to Spanish Inheritance Taxes, provided the former is a Spanish tax resident or where not, if the assets and rights inherited are based in Spain, could be exercised or should be carried out in Spain, noting that the Spanish Tax Office does not distinguish, for this purpose, between inheritors and beneficiaries (contrary to English law).
• Life Insurance policies: beneficiaries will be subject to Spanish taxes provided they are Spanish tax residents or where not, if the policy was taken out with a foreign company operating in Spain.

The above would be applicable so long as Spain does not ratify the Hague Convention on the Law Applicable to Trusts, or the 1^st of July 1985, or it decides to change its laws to accommodate this unique contribution of English law to the legal system, which seems very improbable.

Antonio Flores Corporate Law, Tax Law, Taxes English Trusts and Spain, Hacienda, Spain Taxes Trusts

Offshore is definitely off. The times of the property owning offshore-based companies are over. The glamour associated with names such as Seychelles, British Virgin Islands, Turks & Caicos etc., has now turned into a stigma. Because there was a time in Spain when, if you went to certain summer cocktail parties or high-flying bashes and you did not own an offshore company based in some fanciful island, you were a nobody. In fact, your lawyer was quickly tagged as unsophisticated, uncreative, in essence, not up to scratch with this new posh trend that was all the rage among the richer.

The Mallorca Provincial Audience (May 2010) has sent a lawyer to jail for almost 4 years and given him a fine or €600K  for setting up a “fiscal engineering scheme to instrumentalise defrauding and money laundering procedures “, in the sale of a property in Puerto Pollensa (Mallorca). In this case, he had set up the structure to, among other aims, avoid (or rather evade) paying Capital Gains Tax (at 35%) on the real price (as opposed to the officially declared) when selling his client’s property.

According to the prosecutor, and the judge in the examined ruling, the investigated  law firm indiscriminately offered offshore companies, via the website offshore.biz site (in which even two Mallorca notaries were mentioned), to their clients with the intention of:

• Minimizing the tax almost to the point of exemption.
• Offering 100% protection to the assets.
• Offering 100% anonymity.

The message this Court ruling has sent out is a very clear one: using offshore companies to hold Spanish property does not entitle the beneficiary to legally avoid payment of taxes in Spain, whether you sell the shares, and alongside it, the property. This applies also to the buyer of the structure, who is not exempt from paying transfer taxes.

The Court Office, in reaching its decision, invoked the following:

• Non-Resident Act 5/2004: Capital Gain Taxes obtained, directly or indirectly, from property situated in Spain, will be taxed in Spain. In particular, the following gains are included: when they are originated or derived from rights or shares of a company, resident or not, which assets are made of up of, primarily, directly or indirectly, property based in Spain. The gains obtained from transferring the shares of a company, resident or otherwise, that attribute its ultimate owners the right of their enjoyment in Spain.
• Double Taxation Agreement between Spain and Ireland of the 18th of November 1986: the gains derived from the sale of property can be taxed where the property is located (for some reason, this was invoked as part of the defence strategy).

In this case, the tax office, assisted by the police, found enough evidence of the crime when they were given authorisation by the court to raid the firm’s premises, in which they found not only crucial information on the transaction (particularly deeds of share transfer and deeds of resignation of director and appointment of new director, both done on the day that the property changed hands, bank transfer slips, etc.) but also a private purchase contract for €875,000 for the property in question, when the price paid officially paid was €425,000.

Finally, the Tax Office’s report puts under serious scrutiny Law Firms that, apart from offering the standard juridical, financial and accounting services, have specialized in the design of schemes and structures of fiscal engineering that are utilized to defraud and launder money. These professional firms, which act as company incorporating agents, don’t have as its object international fiscal planning, but are purveyors of mechanisms for subjective simulation, by inserting physical and juridical persons, national and foreign, in the ownership of the assets they intend to conceal. The mechanisms, according to the Tax Office, are as follows:

1. Incorporation of offshore of property holding companies (offshore-based) .
2. Incorporation of Spanish Companies (mostly Limited-SRL), owned by the above offshore, to manage Spanish property. These companies are merely holding property, having scant bank movements.
3. Appointment of directors different from the ultimate owners, either being the same lawyers that created the structure or, as in the case study, someone paid to do the job (and who has also been sentenced to a jail term, albeit suspended). These persons are also authorised to operate both the offshore and the onshore accounts and are, at times, beggars pulled off the street. 
4. Utilization of the law firm’s clients account to receive and remit transfers, with the intention of a) concealing the true nature of the transactions behind the transfers and b) avoiding compliance with anti-money laundering provisions (thereby making it more difficult to know the real nature of the deal).

As a result of the above court action, the lawyer, the ultimate beneficiary and the director were all sentenced to jail terms, although only the lawyer will have to serve time, for the beneficiary paid up the taxes owed prior to the hearing (€135,000) as well as the fines, and the director was found guilty only of conspiracy to defraud.

Offshore is definitely off, and therefore it would be advisable that anyone willing to sell a property owned by a string of companies opted for not selling the shares abroad, because, not only all the above could easily be applicable, but also whoever was buying them would be buying into problem, unless of course he/she was sitting on a pile of cash he wanted to get rid of…(not advisable anyhow).

It may be interesting to see how this links with this new trend of incorporating UE based companies to avoid Spanish Inheritance Tax, particularly UK based, but will leave the study of this dubious proposal for a separate post.

Antonio Flores Companies, Corporate Law, Inheritance, Property, Taxes offshore companies, spanish capital gains tax, spanish inheritance tax

This is the question ex-workers from the company Marsans must be asking themselves after trying to cash, at different BBVA branches, cheques which bounce repeatedly.

This same situation was faced by a client who tried to cash in a cheque for forty thousand euros on an empty account, and is also shared in times of crisis, unfortunately, by many other hundreds who have a euro denomination cheque that is not worth the paper it is written on.

This takes us automatically to the subject of this post, it being the legal implications of giving out worthless cheques or promissory notes as well some notes on how these instruments operate in Spain.

Spanish penal code has eliminated the punishability per se of giving out bad cheques (cheque sin fondos), and has associated it, necessarily, with intent to swindle (estafa) so as to make this a criminal offense. However, swindle with a cheque aggravates the criminal action and carries a higher sentence because it is considered that the “use of certain mercantile instruments to commit swindle irrespective of its authenticity or falsity is in itself graver due to the massive use of these instruments in commerce”.

So what really determines if we go to jail or not is intent. Case law establishes that this intent to defraud has to be precedent, antecedent and causing a material or monetary damage, meaning, in other words, that the perpetrator knows full well from the inception of the contract that he will not comply or be able to comply with his obligation to provide consideration, and will enrich himself by doing this. At the same time, the intent to defraud will have to be parallel to a concealment of the truth, or deceit, and as a judge puts it “not being a clumsy, fantastic or not credible deceit, incapable of moving the will of people constituted intellectually.”

In these type of cases there is very fine and blurred line between a mere civil default and a criminal swindle case potentially able to offer an unappealing 4 year prison sentence, and case law, as usual, offers very interesting situations.

As an example, the courts acquitted 2 businessmen who gave out bad cheques because it was proven, in the first case, that non-payment of them happened in a situation of severe financial difficulty (company loan facilities were not being repaid), and in the second that it was not possible to discern punishable conduct because the accused did not concoct or stage a plan to create an expectation of solvency (inexistent), nor did he omit or conceal elements of reality what would have been enough to dissuade the company delivering Jamones Serranos to do so, particularly when they had been doing business together for many years.

Then there is the interesting figure of the postdated cheque (cheque posdatado) which, although does not change its payment at sight nature (Spanish cheques are ALWAYS payable on demand and within 15 days from them being signed), it does alter the consequence of someone not honouring them, since they are no longer considered to be immediate payment instruments but have morphed into a credit facility, guarantee of payment or deferred payment facility, therefore losing its condition of cheque. This happens, according to the Spanish Supreme Court, when cheques are postdated by at least 1 month or are re-written by the debtor in agreement with the creditor due to the previous ones being at risk of bouncing.

So whenever you are about to stamp your signature on a cheque make sure that it does not bounce and if it does, make sure it does not come back to crush you!

Note: All case law cited here is available upon request.

Antonio Flores Corporate Law, Litigation bad cheques, bouncing cheques, dud cheques