The Supreme Court has just made it crystal clear: when it comes to loans between individuals, especially within families, which is the most common scenario, the Tax Agency will no longer be satisfied with a simple private contract. In a ruling dated November 27, the Supreme Court reinforces the Tax Agency's position: to justify the origin of money deposited into a bank account, it is not enough to simply show the loan agreement. It is necessary to fully demonstrate where the money comes from and how it reaches its destination.
This particularly affects those who ask their parents for help to buy their first home, a very common occurrence. But be aware, because the ruling doesn't just refer to paperwork, but to real and traceable evidence. Family loans and the Tax Agency: what the Supreme Court requires to avoid penalties
Here, the Administrative Chamber leaves no room for doubt. To prevent the Tax Agency from considering this income as an unjustified capital gain (and giving you a hefty fine), you not only have to prove that the loan exists on paper, but also that the money actually moved. A signed contract isn't enough: you have to prove that the money left the lender's account, passed through an identifiable means (a transfer, for example), and entered the borrower's account. Everything must match up: dates, amounts, and transactions. Without this clear and documented chain of events, the Tax Agency can reject the justification. The importance of money traceability.
The ruling marks a turning point in tax audits. If the income arrives in cash or through opaque methods, proving that it's truly a family loan becomes almost impossible. Only if you can show, step by step, where the money came from and how it reached the recipient will the Tax Agency accept it as a loan. The Supreme Court states that traceability isn't just an isolated formality, but rather the strongest evidence if you want to prove the loan's legitimacy.
The Consequences of Not Justifying Money to the Tax Authorities
If the Tax Authorities detect income in an undeclared account, they will ask for explanations. You can say it comes from a family loan (which is exempt from Transfer Tax), but if you cannot clearly demonstrate the origin and validity of the loan, the Tax Authorities can apply Article 39 of the Personal Income Tax Law and consider that money as an unjustified capital gain. This means you will have to add that money to your general income tax base, not your savings base, and pay the highest rates, which in some regions exceed 50%. Furthermore, you will have to pay late payment interest and face penalties that can range from 50% to 150% of the resulting tax liability. Why a Loan Agreement Is No Longer Sufficient on Its Own.
The Supreme Court has closed the door on a widespread practice: trying to "legalize" income already received by later presenting a private loan agreement. That document is still necessary, yes, but it's no longer sufficient if you don't accompany it with objective evidence proving that the money actually moved and that this movement coincides with the income the Tax Agency is questioning. Nor can you use a single contract to justify multiple income streams without clearly demonstrating that each amount comes from the lender. The specific case judged by the Supreme Court.
All of this stems from a real case: the Tax Agency detected several significant income streams in the accounts of some taxpayers, and to justify them, they presented a private loan agreement signed with a family member. The Tax Agency accepted the transfers that clearly came from the lender, but rejected the cash and check deposits because it couldn't be determined who made them, nor was there an equivalent transaction to support them. Both the High Court of Justice of Asturias and the Supreme Court ruled in favor of the Tax Agency. Three essential requirements to avoid problems.
The Supreme Court summarizes its doctrine in three points that must be met together:
Identify the origin of the funds, including who delivers them and how they are transferred.
First, you need to have a well-documented legal basis, such as a loan agreement that genuinely justifies the transaction. Furthermore, it's crucial to demonstrate that the transfer of funds actually occurred, typically with clear and consistent bank records.
In reality, the focus is precisely on this point: if you can't prove that the money moved from one account to another, the tax authorities will presume it's an unjustified capital gain, and that presumption isn't easily overturned.
The problem? When the Tax Agency considers income as an unjustified capital gain, the tax penalty can be severe. This type of gain is taxed within the general income tax base, added to your salary, pension, or any other income, and can place you directly in the highest tax brackets, depending on your earnings.
The Supreme Court has made it clear that Article 105 of the General Tax Law places the burden of proof that the money has a legal origin on you.
There are some fairly common mistakes that lead the Tax Agency to reject a family loan. The most typical are: handing over the money in cash, leaving no trace at the bank; signing the contract after receiving the money; using an overly generic contract to justify several different income streams; the loan amount not being commensurate with the lender's financial capacity; or failing to declare the loan to the regional government, even if it is exempt, which undermines the credibility of the transaction in the event of an audit.
When planning a loan between family members, the Supreme Court's jurisprudence is clear: documentation alone isn't enough; you also need to demonstrate, coherently and verifiably, that a real bank transfer took place. Therefore, to avoid problems, the contract, the money transfers, and the timeline of transactions must perfectly match up. If you can't clearly demonstrate all of this, you risk facing audits, penalties, and a much higher tax burden.
Can family loans be regularized before an audit? Yes, sometimes it's possible to put the documentation in order and formalize the transaction properly before an audit, provided you have objective proof that the loan is legitimate. Without such proof, it's very difficult to avoid audits and penalties.