The Supreme Court has recently established a key criterion that directly affects companies in formation and their shareholders. From now on, the income generated by these companies, as long as they are not registered in the Commercial Registry, will be directly attributed to the shareholders, who will be taxed through to pay tax on it through Personal Income Tax (IRPF). This will leave Corporation Tax (IS) out of application until the registration is effective.
This change has significant tax implications for those companies that operate without being formally registered, so entrepreneurs and their advisors must be aware of this new criterion to avoid possible tax penalties.
What are the key points?
The Supreme Court bases its position on the following points:
- Concept of company in formation: These companies are ‘quasi-types’ that can operate but are not legally constituted until they are registered in the Commercial Register.
- Directors’ liability: Directors who act on behalf of the Company before registration are personally liable, but this does not affect the company’s assets. Once the company is registered, this liability is transferred to the entity.
- Directors’ faculties: Directors may perform acts and contracts necessary for the company incorporation, even if the Company does not have a legal personality yet.
- Tax implication: Only legally incorporated companies are liable for corporation tax. Therefore, the corporation tax generated by Companies in formation must be taxed in the Shareholders’ Personal Income Tax.
Consequences of this decision for the shareholders
When a company is formed, whether by public deed, it does not acquire full legal personality until it is officially registered in the Commercial Registry. However, it is common for companies to start operating before the public deed is registered, carrying out commercial activities, and generating income. Before this change on the Supreme Court’s criteria,, confusion was common regarding whether this income should be taxed in the Corporation tax or if it should be taxed to the Shareholders on their Income Tax.
This is why the new ruling is clear: as long as the company is not registered, it is not considered legally constituted for tax purposes and, therefore, cannot be taxed as an independent entity. Consequently, the income obtained during this period is attributed to the shareholders, who must reflect these gains on their personal income tax returns. It is essential for partners to understand that tax obligations do not disappear but are transferred from the shareholders to the individuals until the partnership is formally registered.
Important tax implications for partners to be aware of
This new criterion directly affects the tax planning of start-up companies and their partners. If you have a company that has started trading but is not registered yet with the Companies Register, you will need to pay particular attention to the key dates. In particular, if registration has not taken place before December 31st, the usual tax year-end date, the income generated will have to be declared by the partners in their personal income tax return, which could have significant implications in terms of the tax burden.
Conversely, if registration takes place before that date, the incorporated company will be liable to tax such income under corporate income tax, which could offer tax advantages depending on the structure and profits of the entity.
The recent Supreme Court decision highlights the importance of understanding the tax implications at all stages of a company’s incorporation. As long as the company is in formation and not registered in the Commercial Register yet, the partners will have to assume the taxation of the income obtained under the personal income tax regime.
This underlines the need for proper planning and the importance of ensuring that all formalities are completed in time to avoid tax contingencies. For this very reason, it is necessary to have expert advice. At LEIALTA, we have a fully specialised team that will guide you in managing your tax obligations. Do not hesitate to contact us to resolve any doubts you may have; we will be delighted to help you at any time. We look forward to hearing from you!
