April 2023

Criminal tax fraud is defined as an intentional wrongdoing with the specific purpose of evading taxes known to be owed. Therefore, criminal tax fraud requires both a tax due and a fraudulent intent.

Pursuant to article 305 of the Spanish Criminal Code (hereinafter the "Criminal Code"), criminal tax fraud exists when the following requirements are met:

(i) The unpaid quota exceeds EUR 120,000, which is calculated separately per year and tax (objective element).

(ii) A fraudulent intent exists (subjective element).

Trigger points revolve around determining the amount defrauded and the fraudulent intent. In this sense, these are typical trigger points that the STA must prove under Spanish criminal and tax law:

• Finding evidence that the behavior of the taxpayer was aimed at hiding or concealing the taxable event. Some criminal cases have been based on testimonies or internal documents demonstrating that the taxpayer was aware that the tax was due and that certain measures were taken to conceal such situation.
• Sham transactions or re-characterization of the nature of the transaction or functions performed based on the real economic substance hidden to the Tax Authorities or intended to be hidden to them by the taxpayer.
• Tax residency matters or the use of fiduciary structures to avoid the payment of taxes.
• Participation in VAT carrousel and alike structures.
• Hampering, resisting or failing to cooperate with the investigation. Oftentimes, this implies failing to deliver documents or delivering misleading information to the STA. Therefore, the lack of collaboration can be viewed as evidence or indication of the fraud.
• Filing tax returns do not automatically exclude criminal tax fraud as fraudulent intent can still be proved through other means.

As previously mentioned, an unpaid quota that exceeds EUR 120,000, can trigger criminal proceedings.

No. In Spain criminal tax fraud exists when the unpaid quota exceeds EUR 120,000 and a fraudulent intent exists (subjective element).

If the requirements are fulfilled, any tax non-compliance can be declared a criminal offence.

As noted at 1, criminal tax fraud requires both a tax due and a fraudulent intent.

Negligence is not sufficient to commit criminal tax fraud. The Spanish Supreme Court's case law establishes that the fraudulent intent usually implies a behaviour consisting of hiding or concealing the reality of the transaction or taxable event (Supreme Court. Case Nº 448/2021. 26 May 2021).

Thus, the decisive element to determine whether a tax case becomes a criminal proceeding is the suspicion that there has been an intention of concealment in the actions of the taxpayer. In this respect, dispute on valuation or interpretational issues should not become the basis of a criminal offence as they are technical discussions that do not consist on whether the taxpayer has the intention of defrauding the fiscal authorities.

Spontaneous filing of an amended tax return before the initiation of a tax audit or criminal proceedings will prevent triggering a criminal liability when the tax liability is fully recognized by the tax payer and paid to its full extent. In this respect, the amended tax return will not trigger criminal liability; but just the opposite, if properly done, it will exclude criminal liability.

Please note that criminal proceedings for tax fraud can be initiated even if a tax return was previously filed spontaneously. In this case, the taxpayer will plead this submission before the Court before any tax inspection or criminal complaint was initiated against the taxpayer.

A criminal proceedings for tax fraud can be initiated by the Public Prosecutor or by any other particular accusation (the State Attorney on behalf of the STA, for instance). Please take into account that the investigation of facts under a criminal proceedings are not classified as specific felonies until the investigation phase ends and the accusation parties file their bill of indictment.

In that sense, there are many examples of criminal investigations for mayor corruption cases in which, at some point of the investigation phase, the Public Prosecutor includes tax fraud amongst other felonies (bribery, money laundering, membership of a criminal organization, for instance).

In addition, whenever the STA considers the taxpayer's conduct as a criminal offense, then they are under the obligation to inform the ordinary courts or send the file to the prosecutor's office. If the prosecutor agrees with the STA position, then the Public Prosecutor will file the criminal complaint before the competent criminal court.

The STA is not under the obligation to stop the tax audit when it detects indicators of a potential criminal tax offence. The general rule, therefore, will be that the STA can continue to request further information, issue the tax assessment and initiate the actions to collect the tax, even if criminal proceedings begin. In these cases, two different tax assessments are issued: (i) one regularizing the taxes not affected by a criminal procedure, which will follow its normal course for appealing and debt collection; and (ii) another regularizing the facts, adjustments and taxes that may constitute a criminal offense.

In this second case, the tax auditor will, first, issue a liquidation proposal and, then, will open a hearing and allegations period for the taxpayer, after which the tax authorities have the option to issue a tax assessment "linked to a criminal offense".

Once the tax assessment is issued, the file will be sent to the criminal court with a criminal complaint or to the prosecutor. This way, the criminal courts will review the assessment linked to a potential criminal offence and its legal grounds.

If the court does not admit the complaint, then the tax audit procedure will be moved back to the administrative stage of the tax proposal. The tax penalty procedure may be reopened or started after the regular tax assessment is issued.

If the criminal case is dismissed, then it can be returned to the STA. Depending on the reasons for such dismissal, the STA can maintain its previous assessment (considering it final) and even initiating administrative penalty proceedings (if the criminal court's decision excludes criminal intent but not negligence). However, if the court considers that certain alteration of the facts are proven, or the court has dismissed the case because it does not support the assessment or its technical grounds, then the STA will be under the obligation to adjust their previous assessment in accordance with such views.

When the criminal court issues a verdict of guilt in a tax offense, then the tax debt may also be subject to the adjustments required to comply with that judicial decision.

The regulations allowed the STA to send a case to the prosecutor after finalizing the audit (without informing the taxpayer that the final assessment was linked to a potential offense) or even after imposing administrative penalties. However, the Spanish Supreme Court ruled against such regulations and established that a criminal case cannot start once the assessment has finally been made (standard assessment, not linked to a potential offense) or an administrative sanction has been imposed.

As a general rule, the Criminal Code establishes a statute of limitations of five years. However, it also establishes a period of 10 years for aggravated tax offenses, namely, cases where the unpaid quota exceeds EUR 600,000 or the tax offense was committed in the midst of a criminal organization, using middlemen or figureheads and tax havens.

For administrative offenses, the statute of limitations period is four years.

The statute of limitations starts to run when the term for voluntary filing of the relevant tax return ends.

The following consequences are applicable in case the criminal court finds the defendant/taxpayer guilty:

A. Penalties

a. Individuals

Penalties for individuals range from one to five years of imprisonment and a fine of up to six times the amount of the tax liability (i.e., unpaid tax quota).

An aggravated tax offence is punishable up to six years of imprisonment.

b. Corporations

When the company does not have a proper compliance program in place (see answer to question 10 below), it can be convicted as follows:

• If the offense committed by the individual has a prison sentence of more than two years, the entity will face a fine of twice as much as the amount defrauded or unduly obtained.
• If the crime committed by the individual has a prison sentence of more than five years, the entity will face a fine of two to four times the amount defrauded or improperly obtained.

In addition to the penalties mentioned above and attending the specific circumstance of the case, Judges and courts may also impose additional and quiet serious consequences for the corporation:

• Dissolution of the legal person.
• Suspension of its activities for a period not exceeding five years.
• Closure of its premises and establishments for a period not exceeding five years.
• Prohibition to carry out in the future the activities in the exercise of which the offence has been committed, favoured or concealed. This prohibition may be temporary or definitive. If it is temporary, the term may not exceed 15 years.
• Disqualification from obtaining public subsidies and aid, from contracting with the public sector and from enjoying tax or Social Security benefits and incentives, for a period not exceeding 15 years.
• Judicial intervention to safeguard the rights of workers or creditors for the time deemed necessary, which may not exceed five years.

B. Mitigating circumstances

In order to determine the penalty within the above-mentioned ranges, Judges and Courts should take into account mitigating circumstances. Some mitigating circumstances are linked to the payment of the amounts claimed:

• Very qualified attenuator of timeless regularization, is a mechanism of the criminal code to reduce the penalty imposed on those who collaborate in the judicial investigation once the criminal process has begun. The attenuator operates automatically and implies a considerable reduction of the penalty. However, it also implies payment, within two months from the time the company receives the writ of summons as an investigated from the court, of the entire amount claimed (plus interest). In addition, it implies acknowledging the totality of the facts of the accusation and accepting a conviction in conformity. Therefore, it implies an inability to discuss facts or amounts. The recognition of criminal acts, which will be included in the sentence, means a waiver of the appeal against the conviction for substantive reasons.
  
  In practice, if this is the route chosen, there are certain elements that can be negotiated with the public prosecutor and the state attorney (who represents the STA in the criminal proceedings).
  
  
• Generic attenuation for payment (deposit the due amount). This mitigation circumstance is more flexible, since the amounts can be paid at any time before the oral trial. The merits of the case can be defended in court and request a free acquittal It does not require the acknowledgment of guilt and, therefore, there is a possibility of discussing facts and amounts.
  
  Other mitigation circumstances can also apply, for example, in the case of undue delays of the procedure from the judicial or administrative authorities, confession and cooperation with the judicial and administrative authorities.

C. Civil liability

In addition, those convicted of a tax offence will have to pay the amount defrauded and the resulting legal interest as civil liability.

Those convicted of a tax offence shall be directly and jointly and severally liable for payment.

In the event that the company is not finally convicted of committing a tax offence because of having a proper compliance program, it would be vicariously liable for these amounts.

D. The attempt of a tax offence

Under Spanish Law it is not possible to punish an attempt to commit a tax offence. Tax offence is a "result crime". It means that it punishes active conducts that results in a negative outcome for the public treasury. Therefore, the mere attempt to commit the offence, if not completed, is not punishable.

a. Is there a significant likelihood that a managing director of an entity will actually go to prison for tax conduct that the entity took even if the managing director did not know about the conduct or was not directly involved in the conduct?

According to Spanish law, it is not possible to convict a person (regardless of his or her position in the company) unless he or she has had a direct or indirect relationship with the facts that are the object of the proceedings and his or her actions have been necessary for the commission of the criminal act. Therefore, strict liability by reason of position is prohibited.

This does not mean that a person (general manager, member of the board of directors) cannot be charged at the outset, although, if his or her lack of connection with the facts is proven, he or she cannot be convicted. And in practice, directors and those in charge of tax matters are indeed subject to investigation.

Regarding the possibility of actual imprisonment in Spain for this type of offence, please note that the Judges and Courts may decide to suspend the prison sentence (i.e., the sentence will be served in freedom) when the following requirements are met: no criminal record, payment of the civil liability recognised in the sentence (or at least the willingness to comply with this civil liability through a payment schedule) and that the prison sentence imposed is equal to or less than two years. In practice, it is common that they accept such suspension if the requirements are met and it is usually part of the negotiations in case the company decides to try to reach an agreement (see answer to question 15 below).

b. Is there a significant likelihood that the entity will be debarred from government or other contracts if the entity is convicted?

Regarding tax fraud, apart from the fines that can be imposed, the legal person responsible will be subject to the loss of the possibility of obtaining public subsidies or aid and the right to enjoy tax or Social Security benefits or incentives for a period of three to six years. The prohibition to contract with Public Administrations may be imposed, but that will depend on the circumstances of the case and the criteria of the Judge or Court.

These circumstances to be taken into account include, inter alia, the following:

(a) Their necessity to prevent the continuation of the criminal activity or its effects.

(b) Its economic and social consequences, and especially the effects on the workers.

(c) The position in the structure of the legal person occupied by the natural person or body that breached the duty of control.

Yes, having a compliance program may exonerate or, at least, mitigate criminal liability of corporations. In order to exonerate criminal liability it should be determined the existence of a compliance program prior to the commission of the criminal offence, which is effective in preventing the risks and complies with the legal requirements of article 31 bis 4 of the Criminal Code:

1. Identification of activities where criminal offences can be made.
2. Establishment of protocols or proceedings that demonstrate the entity´s process of adopting resolutions and actions aimed to prevent situations of criminal offences.
3. Availability of models for administering financial resources to prevent criminal offences.
4. Establish the obligation to inform the Authorities possible risks and breaches to the models referred above.
5. Establish a disciplinary system that sanctions adequately the failure to comply with the measures taken in the models.
6. Periodic revision of the model and its eventual modification when circumstances makes it ineffective.

When the compliance program has not been in place before the commission of the criminal act or does not comply with the requirements set forth in the Criminal Code, it shall be a mitigating circumstance when it is properly implemented and complies with the legal requirements prior to sentencing.

The Supreme Court case law has established that the presence of these minimum requirements supposes the mitigation or cause of exemption from criminal liability (Supreme Court. Case Nº STS 154/2016. 29 February 2016).

The voluntary tax adjustment will be considered as exonerating from criminal liability when it meets the requirements mentioned in question 9: (i) it is made before the start of any inspection activity or the filing of a complaint against the taxpayer; (ii) the adjustment is complete; and (iii) the amount due is paid. The way to do it is by filing amending returns.

In that case, even if criminal proceedings are initiated against the taxpayer, no criminal liability can be imposed.

In the event that the confession and/or payment of the amounts is made after criminal proceedings have been initiated, in that case, it will be taken into account for the purpose of determining the penalty as it is considered to be an attenuating circumstance of criminal liability.

As mentioned in our answers to question 9, there are mitigating circumstances based on the payment of the amounts due, but it will not exclude criminal liability.

Yes. If the STA receives a communication from a jurisdictional authority in which it is ordered that the administrative proceeding must be suspended, then the STA's statute of limitations period will be suspended.

Yes. Please refer to question 6.

As mentioned earlier, the STA is not under the obligation to stop the inspection when it detects indicators of a potential criminal tax offence. Thus, the STA can continue to request further information, issue the tax assessment and initiate the actions to collect the tax, even if criminal proceedings begin, but in such case no administrative penalties can be imposed.

However, such assessment will be considered as provisional and subject to the review and final assessment by the Criminal Court.

Yes, it is possible to reach a tax/criminal settlement with the correspondent authorities.

Regarding the tax authorities, the settlement will ultimately depend on the facts and the merits of the case as the STA will likely be more interested in collecting taxes than the possibility of the case becoming criminal. If the case's substance is technical rather than criminal, then the prospect of reaching a settlement with the STA is higher and the prospect of the criminal proceeding will be remote. Otherwise, the settlement can be reached reducing the public impact and the penalties to be imposed but it will require the taxpayer or one of various of the individuals investigated to recognize the crime and be considered as guilty of the criminal offence.

Regarding the Judicial Authorities, it is possible to reach a settlement with the Public Prosecutor and the State Attorney in order to reduce the penalties to be imposed. However, it will be necessary to recognized the commission of a criminal offence on the terms the accusation parties claim.

Both individuals and companies may be found criminally liable for a tax criminal offence (and civil liable for the civil liability that arise from the criminal offence).

Therefore, criminal charges could be filed against both the company - or companies - and the individuals considered as responsible for the company's actions. In our experience, except where specific evidences exist regarding the participation of other individuals, the company's directors and the employees in charge of their tax matters are usually the ones under investigation.

Yes. If either the company or the individuals are foreigners or not resident in Spain, this does not exclude the possibility of prosecution.

Yes, please refer to question 9.

The company is liable for the amounts claimed as civil liability for tax offences, i.e., for the amount defrauded.

In the event that the company is convicted of a tax offence, it will be directly liable for the payment of the civil liability (amount defrauded plus legal interest).

If the company is not convicted, but one or more of its employees are convicted, then it will be vicariously liable for the payment of this amount.

Moreover, fines are personal and non-transferable. Therefore, each person convicted of a tax offence will be fined a personal fine.

If the company is convicted, it is obliged to pay the fine to which it is sentenced.

If the company is exonerated, but one of its employees is convicted, it is not obliged to pay the fine imposed on its employee(s).

In the last five years, there have been some relevant criminal cases connected with multinational groups and celebrities. Oftentimes, these cases involve structures considered by the tax authorities as pure tax-driven or sham transactions. They imply the use merely of conduit companies to hide income with the purpose of avoiding taxation. These cases also discuss tax residency and beneficial ownership of the taxpayer.

Other cases deal with tax deduction of "illegal expenses", but they are primarily connected with anti-bribery measures and are just a side effect of corruption cases.