1. Tax Authority’s Power to Audit Tax Credits for 10 Years.
The recent Spanish Supreme Court judgment of 23 July 2026 confirms that the Tax Administration may review tax credits (tax loss carryforwards, deductions, or tax balances pending offset) for a period of 10 years, even where they originate from tax years that are statute-barred, provided that such credits continue to produce effects in tax periods that remain open to assessment.
The case examined by the Supreme Court concerned a company that had accumulated VAT balances pending offset and subsequently applied them in VAT returns for non-prescribed periods subject to a tax audit. The company argued that the Tax Administration could not review those balances because the right to assess the tax years in which the balances had arisen had already become time-barred.
The Court highlights the distinction between the right to assess taxes and the Tax Administration’s power to verify and investigate. While the right to regularise a tax liability through an assessment is subject to the general four-year limitation period, the power to verify tax items originating from statute-barred years that continue to have effects in subsequent periods open to regularisation is subject to a ten-year period.
To reinforce this distinction, the 2015 reform of the General Tax Law (Law 34/2015) introduced Article 66 bis, establishing a specific regime for tax audits. Although the statute of limitations prevents the Tax Administration from assessing a given tax year, it does not prevent it from reviewing tax credits generated in that year where those credits continue to have effects in non-prescribed periods.
Accordingly, the Supreme Court dismissed the taxpayer’s appeal and established case law confirming that the Tax Administration may verify VAT balances pending offset and other tax credits generated in previous periods, provided that such verification takes place within the framework of proceedings relating to tax periods for which the right to assess has not become statute-barred.
2. The “Chance Discovery” Doctrine and Documentation Obtained Outside the Period Expressly Covered by a Judicial Authorisation.
The recent Supreme Court judgment of 24 July 2026, issued by its Administrative Chamber, examines whether documentation obtained during a court-authorised search carried out in connection with specific tax years, in this case 2016 and 2017, may support the assessment and imposition of penalties relating to a different tax year, namely 2015, under the so-called “chance discovery” doctrine.
In the case at hand, the Tax Administration initiated a general tax audit at the company’s premises for the 2016 and 2017 tax years, pursuant to a judicial authorisation that did not expressly limit the years covered. During the search, documents relating to the 2015 tax year were seized and later analysed at the Tax Administration’s offices. The company challenged the resulting assessment and penalty concerning 2015, arguing that the judicial authorisation had been exceeded and that its constitutional right to the inviolability of the home had been violated. The central issue was whether the chance discovery doctrine could extend the admissibility of evidence to a tax year not originally covered by the investigation.
The taxpayer argued that the 2015 documentation had been obtained without explicit judicial authorisation for that year. The Tax Administration countered that the judicial order did not expressly restrict the investigation to specific years and that the extension of the audit’s scope had subsequently been notified to the taxpayer, with no infringement of rights having occurred.
The Supreme Court upheld the position of the Spanish Tax Agency (AEAT), finding that the inspection actions were fully lawful in light of the chance discovery doctrine. The Court reasoned that the judicial authorisation for entry and search had been validly obtained and had not been challenged, and that the documentation relating to the 2015 tax year, although identified after the commencement of the inspection, was directly connected to the audited economic activity. The Court further held that the actions could not be regarded as indiscriminate, excessive or disproportionate.
The judgment also emphasises that the extension of the scope of the proceedings was duly communicated to the taxpayer, thereby safeguarding procedural guarantees and the taxpayer’s right of defence throughout the process. Accordingly, the Court dismissed the company’s claims and fully upheld the lower court’s ruling.
Finally, the Supreme Court established doctrine regarding the application of the chance discovery principle in tax matters, reaffirming existing case law without introducing any substantial changes or qualifications to the already established doctrinal framework.
3. Taxation Criteria for Foreign Employees Temporarily Assigned to Spain.
On 3 July 2026, the Spanish Directorate-General for Taxation (DGT) issued Ruling V5112/2026, analysing the tax treatment applicable to employees hired by a company resident in Saudi Arabia who are temporarily assigned to Spain to perform their services.
Under the facts considered, the employees retain their habitual residence, family home, employment relationship and centre of vital interests in Saudi Arabia, while their stay in Spain does not exceed 183 days. In addition, their remuneration is paid entirely by the Saudi company, and the Spanish entity neither assumes nor recharges the corresponding payroll costs. The involvement of the Spanish company is limited to certain administrative and employment-related functions.
The key issue is whether remuneration attributable to work physically performed in Spain may be subject to taxation in Spain and, in particular, whether the Spanish company could be regarded as the employees’ actual employer.
The Spanish Directorate-General for Taxation (DGT) bases its analysis on Article 15 of the Double Taxation Agreement (DTA) between Spain and Saudi Arabia, which follows the OECD Model Tax Convention. As a general rule, this provision establishes that where an employee resident in one State (Saudi Arabia) physically performs employment in another State (Spain), the latter State (Spain) is entitled to tax the corresponding employment income. However, an exception applies whereby the State of residence (Saudi Arabia) retains the taxing right, provided that three conditions are met: the employee’s presence in the host State does not exceed 183 days in any twelve-month period; the remuneration is paid by an employer that is not resident in Spain; and the remuneration cost is not borne by a permanent establishment of the employer located in Spain.
Despite the fact that these three conditions are satisfied and, at first sight, it would appear that the State of residence (Saudi Arabia) should retain the right to tax the income, the ruling introduces an important qualification regarding the second requirement. According to the DGT, it is not sufficient merely to identify the party formally designated as the employer under the employment contract. Following the OECD Commentary to the Model Tax Convention, the DGT emphasises that it is necessary to determine who acts as the effective employer, irrespective of the contractual arrangements. Relevant factors may include who gives instructions to the employee, who controls the workplace, who bears the risks and assumes responsibility for the outcome of the services provided, who supplies the tools and equipment, and who determines holiday entitlements and work organisation, among other considerations.
The ruling also highlights the importance of the economic structure of the relationship between the two companies. In particular, the direct recharge of employment costs may indicate that the recipient entity is, in substance, the economic employer, although the DGT stresses that this is only one factor among several and must be assessed together with all other relevant circumstances.
Ultimately, the significance of this ruling lies in the fact that, in the context of international employee assignments, it is not sufficient merely to verify compliance with the 183-day threshold or to identify the formal employer. It is equally essential to examine the substantive nature of the relationship between the companies and the degree of integration of the employees within the recipient entity. Only a comprehensive analysis of all the facts and circumstances of each case will allow for a reasonably well-founded determination of the jurisdiction entitled to tax the employment income.
