top of page

Economic Realty Principle: What is it?


According to Legal Opinion OJ-080-2018, the Economic Reality Principle is a method for interpreting the Tax Rules that assigns a meaning to the facts, per reality, for tax purposes. This might imply disregarding legal forms of Private Law that taxpayers adopt in their legal-economic relations when these do not meet the reality that the tax rule wanted to levy with a certain tax. The Contentious Administrative Court, Section VIII, by Judgment No. 00114, on December 17, 2013, at 9:00 hours, conceptualizes the Economic Reality Principle as follows:


"... a way of accrediting the truth of the facts and legal acts and as an instrument of interpretation, and based on a serious, detailed, objective study and without exceeding its authority, it disregarded the form adopted by the audited company, and reached its underlying economic reality".

More recently, in Judgment No. 128-2020-VI, from September 29, Section VI of the Treasury's Contentious Administrative and Civil Court ruled along the same lines regarding the application of the economic reality principle as a kind of anti-avoidance rule, as it empowers the Tax Administration to disregard the forms alleged by the parties and to conduct an inquiry to determine whether, from the economic relationship, it is possible to establish the accrual of a different taxable event than the one alleged by the parties. In this proposition, which is also repeated in Judgment No. 0004-2021-VI from January 19, 2021, the Court considers that the purpose of the economic reality principle is not to disregard the agreement entered into by the parties legally but rather that its effects should not be opposable when tax evasion is being sought.


The statement concludes that this principle "seeks, strictly speaking, to uncover the underlying material reality of the transaction and thus determine whether the form used is a shield to minimize tax burdens, in which case, that obligation must be adjusted to its proper channel, or whether, on the contrary, it is a lawful and legitimate act, and not only a formal appearance."


There are some legal figures that taxpayers turn to for tax benefits (sometimes for financial purposes), so the legal system needs clear regulations to support the management of the Administration. The Economic Reality Principle and the anti-abuse clauses are valid tools in determining and controlling taxes, as well as for the proper Administration of justice so that the corresponding legal framework is applied to issues as they are.


 

At DFV Asesores Empresariales, we are here to help you in every stage of tax compliance. Contact us at 4010-1076 or info@dfvasesores.com.

23 views0 comments

Recent Posts

See All

Comments


bottom of page