Two recent Supreme Court rulings have highlighted the importance of building a solid and credible case regarding transfer pricing, which is directly linked to the proper definition of related-party transactions. Similarly, a ruling by the National Court has modified the transfer pricing adjustment proposed by the Spanish Tax Agency, as the court found that the Agency had failed to take into account market circumstances or the clearly identifiable evidence provided by the Spanish taxpayer.
Judgments 1746/2026, dated April 22, and 3721/2025, dated July 15, handed down by the Supreme Court, focus on the regularization of the cash pooling system in place at the Bunge Group that affected its Spanish subsidiary. Through these rulings, the Supreme Court has established legal precedent regarding two aspects: (i) the rejection of asymmetry in the applicable interest rates and (ii) the consideration of the group’s credit rating, rather than the individual credit ratings of the participants, for the analysis of credit risk in transfer pricing matters. Furthermore, the Supreme Court has also noted that, in the specific circumstances of the Bunge case, the parent entity did not actually assume any significant risk nor did it perform functions that went beyond the mere administrative management of cash flows—both of which could justify high remuneration for that entity—and therefore its remuneration was neither consistent with nor linked to its functional profile and operational reality.
These rulings are significant because they establish the Supreme Court’s precedent on certain aspects of how cash pooling systems are treated for transfer pricing analysis; however, for the purposes of this article, the key issue is why the Supreme Court accepted the Tax Agency’s position in its reassessment. The answer to that question lies in the discrepancy between the documentation and evidence provided by the taxpayer to justify its transfer pricing policy and the precise definition of the cash pooling operation under review. Specifically, Bunge submitted as documentary evidence a transfer pricing report prepared by an external consultant, which justified the interest rates applied (through an external comparative analysis) and detailed the remuneration of the pool leader. The Supreme Court held that, although the report was technically correct, it described a cash pooling system that was, in essence, different from the one actually implemented by the Bunge Group; in other words, the Supreme Court made no mention whatsoever of the use of erroneous technical criteria in the analysis conducted, but rather noted that the actual cash pooling arrangement differed from the one described in the report, and therefore the conclusion reached in the report could not be applied to Bunge.
With regard to Judgment No. 2893/2025, dated June 19, the National Court reversed the position adopted by the Central Administrative Court in the previous instance, rejecting the position of the Spanish Tax Agency, which had deemed the interest paid by a
A subordinated loan granted by the group to an affiliated entity as part of a transaction related to the acquisition of assets. This transaction was carried out as part of a divestiture and restructuring mandated by the National Securities Market Commission to authorize the merger between Unión Fenosa and Gas Natural (subsequently, the Naturgy Group). That merger was financed primarily through external debt provided by various financial institutions, which also required a minimum investment by the shareholders through a capital increase, as well as the aforementioned subordinated debt.
The Spanish Tax Agency reclassified the loan as equity, arguing that this transaction would not have taken place between independent parties, based on the following two arguments:
i. The agreed-upon terms: long-term repayment, interest capitalization, high interest rates, and no collateral.
i. The assumption that no third party would have provided financing in this case, since the borrower would have no additional borrowing capacity after the initial external financing was granted.
This position taken by the Spanish tax authorities was primarily based on arguments, without providing solid or credible evidence regarding market conditions and the financing of this type of merger-related transaction in the gas sector, nor an independent external assessment of the borrowing capacity of the borrowing entity.
On the contrary, the taxpayer provided two specific reports as evidence. The first report demonstrated that the taxpayer’s debt-to-equity ratio was in line with that of other entities in the sector and that the taxpayer already had additional borrowing capacity. A second report provided information about the gas sector, how it operates, and how it is financed, concluding that the structure of the transaction was reasonable and consistent with industry practice.
Based on the substantial documentary evidence provided by the taxpayer, the National Court not only accepted the taxpayer’s position but also reaffirmed that the Spanish Revenue Service had failed to provide both adequate evidence and sufficient knowledge regarding the behavior of players in the gas sector.
In conclusion, these statements clearly illustrate the importance of maintaining a proper link between the accurate characterization of any related-party transaction and the preparation and maintenance of robust and contemporaneous documentary evidence in the field of transfer pricing, as well as establishing strong and defensible mechanisms prior to any audit or appeal proceedings.
