TAX LAW DIVISION
A new judgment strengthens taxpayers’ legal certainty in relation to “dual-track” or “conditional” tax assessments.
Can the Tax Inspectorate classify a transaction as fraudulent and, in the same document, prepare a second basis for assessment in case a court rejects the first? The Supreme Court has answered no. In its judgment of 7 July 2026, the Administrative Chamber rejects “conditional” or “dual-track” tax assessments, a practice used to shield tax adjustments against potential adverse court rulings.
The practice involves the Tax Inspectorate putting forward a primary argument — for example, the existence of tax fraud — and, in the same assessment, adding an alternative justification in the event that the courts overturn the initial classification. If the primary argument fails, the Administration seeks to maintain the tax liability on the basis of this fallback argument.
The dispute arose from a complex corporate transaction. In 2004, the Spanish subsidiary of an international group received shares in a Swedish subsidiary, valued at €346 million, through a capital increase. In 2010, following the dissolution of that subsidiary, the company recorded a deductible loss for Corporate Income Tax purposes of more than €46 million arising from exchange-rate differences.
The Spanish Tax Agency considered that the transactions constituted tax fraud under the former General Tax Law of 1963. However, anticipating that this classification might be overturned on procedural grounds, it included a subsidiary argument: if the tax fraud finding was not upheld, the valuation rules under Article 15 of the Consolidated Corporate Income Tax Act (TRLIS) would apply. Those rules would result in the investment being valued at its historical share capital of €222,977.87 rather than at market value. The outcome would likewise have been the disallowance of the deduction.
The Central Economic-Administrative Tribunal (TEAC) subsequently annulled the finding of tax fraud because the proceedings had been conducted under legislation that had already been repealed. Nevertheless, both the TEAC and the National High Court upheld the continuation of the tax adjustment on the basis of the subsidiary argument.
The Supreme Court has now rejected this practice, holding that the two grounds are incompatible. Anti-avoidance rules, such as those relating to tax fraud, are based on the existence of legally objectionable conduct, whereas ordinary valuation rules presuppose lawful transactions unrelated to any fraudulent purpose. The Tax Inspectorate cannot therefore rely simultaneously on both premises.
The judgment stresses that the Administration cannot determine the legal effects of its own unlawful acts in a manner that serves its interests. In the Supreme Court’s view, the dual-track approach causes a lack of effective defence, since the taxpayer was only able to formulate its defence against the primary argument and not against an alternative argument that would be activated if the first one failed.
The doctrine established by the judgment rests on three points: once a judicial finding of tax fraud has been annulled, the Administration cannot maintain the tax adjustment on the basis of a different and incompatible ground; it cannot base a tax liability in the same assessment on tax fraud and, alternatively, on valuation rules in the event that the fraud finding is annulled; and the alternative use of both approaches infringes the taxpayer’s right of defence.
The ruling does not, however, prevent the Administration from issuing a new tax assessment after an earlier assessment has been annulled on formal or procedural grounds, provided that a new procedure is initiated. What it does prevent is the incorporation of that second route in advance into the same assessment.
Although the case concerns Corporate Income Tax, the principle may extend to other taxes, such as Personal Income Tax (IRPF) or VAT. The judgment therefore strengthens legal certainty and requires the Tax Inspectorate to establish its legal basis rigorously from the outset, without reserving alternative arguments to deploy “just in case” its initial position does not prevail.
