The Trade Registry (Companies House) of Valencia has sent a letter to all registered companies. This letter is interpreted by many people as a notice with unpleasant consequences if certain conditions are not met. Only the Trade Register of Valencia sends this kind of message, by the way. Other trade registers do not. Here is an example.
It is not a notice, more of a warning or ‘urgent advice’ to legalise your books, referring to your obligations as a company as laid down in articles 25 to 27 of the Codigo de Comercio (Spanish Trade Act). The letter lists certain obligations and gives their own interpretation of the civil and tax implications if these obligations are not met. The way this letter is written gives the impression that you will not only get into trouble with Hacienda but can find yourself liable if you do not follow the advice.
This ‘advice’ has been written in a misleading way in my opinion. The style of writing reminds me of spam emails I regularly receive about domain registration (example). These emails make the impression to have been sent by an official body and if you don’t pay, your domain will disappear. However, the sender is nothing more than a commercial company that has nothing to do with official domain registration. Yet many people fall for these emails and that’s where the profit of this commercial company lies.
As explained further below in this article, the Valencia Trade Registry has about 4 million reasons to approach companies this way.
Codigo Comercio and the obligations
It is true that the ‘Codigo de Comercio’ was born on 22 August 1885 and that it contained obligations that could perhaps be considered logical or reasonable at the time. According to articles 25-27 of the Codigo de Comercio you have to keep several ‘books’. Obligatory financial ‘books’ are an inventory, the annual accounts and a journal. Other mandatory books are the shareholders’ register and the minutes.
The idea of the regulation in the Codigo de Comercio (note that this idea was born more than 125 years ago) is that the paper version of the minutes and the shareholders’ register will be ‘legalised’ after the incorporation of the company. In practice, this is no more than a stamp on each (still empty) page of a stack of blank paper, and a sticker with the signature of the register, before this paper is put into use. All pages of that stack of paper must be numbered in chronological order. For example, once the minutes have been printed on the stamped and numbered paper, no one can change them by taking out a page and inserting it again. That would be immediately noticeable. In that case, the numbering does not run chronologically anymore and there is no stamp on the page in question.
The same applies (better said applied) to the financial books. Before you can book entries in, for example, the journal, the paper on which the entries are written must be legalized. Subsequently, the director is expected to file within 4 months after the end of the financial year those pages, that are now filled with entries, to be legalised again, but this time bound together in the form of a book.
The idea here, too, is to prevent the figures from being manipulated afterwards. It is – in the setting of 1885 – a reasonably good system to ensure that there is no tampering with the books, since changes (after legalisation) are immediately noticeable and the books, especially once they are bound as a book, cannot be changed. As you can understand, legalisation in itself says nothing about the content and accuracy of the figures. The legalisation only confirms those figures that have been booked.
Although the Codigo de Comercio regulation has been adapted here and there over the years, the articles on legalisation in question have not. This legislation is therefore quite outdated. Today, of course, the means of checking books differ substantially from those of 1885.
Consequences in the civil sphere of failure to comply with these obligations
As said, the obligations of the Codigo de Comercio are aimed at making it as difficult as possible to tamper with the books. It therefore has an internal and an external aspect.
- Internal: to the shareholders, who must have accurate and truthful information at their disposal in order to be able to supervise and monitor the management;
- External: to investors or business partners, who want to have an accurate and truthful financial picture of the company in order to be able to make the right decisions about business relations with the company;
There are no legal consequences in the civil sphere for not legalizing. A managing director or entrepreneur who does not have the figures legalized may be formally at fault, but in reality, nobody is bothered about that, except for the Valencia Trade Registry because they miss out on fees.
The other way around, as mentioned above, legalisation does not prevent tampering with the books. An entrepreneur or director who commits fraud is not released from that fraud at the moment he legalises the books.
In 2017, more than 120,000 companies were registered with the trade register in the state of Valencia. If all these companies have their books legalised at the rate of approximately € 33.50 ex IVA (for the 3 ‘compulsory’ books) then you understand why the trade register has more than 4 million reasons to frighten companies with this kind of messages.
Consequences in the tax sphere of not complying with these obligations
It is absolutely not true, what this letter from the Trade Registry of Valencia suggests, that your financial administration loses any legal value in relation to Hacienda.I am involved in many inspections every year, and the digital data exported from the accounting software is directly accepted by Hacienda. In fact, the subsequent inspection is aimed on the one hand at a comparison with the returns that have been made, and on the other hand at checking whether the figures declared correspond to the figures in the accounts. On the other hand, it is aimed in particular at checking the underlying documents (accounting documents): invoices, contracts, notarial deeds, receipts, bank statements, etc.
In practice, I do not know of any cases where the failure to legalize meant that Hacienda did not consider a simple printout from your bookkeeping as sufficient proof. In none of them did the Inspector even ask for it. Nor have I come across any cases in case law. On the contrary, the law explicitly states that you may provide evidence in any legal way. Providing legalized books is just one of them. Legalisation has no added value whatsoever in terms of proof, because the figures are ultimately only a reflection of the underlying accounting documents. As already mentioned, an entrepreneur only has a problem with the tax authorities if those underlying documents show a different picture than the submitted returns. I am involved in many inspections every year, and the digital data exported from the accounting software is directly accepted by Hacienda. In fact, the subsequent inspection is aimed on the one hand at a comparison with the returns that have been made, and on the other hand at checking whether the figures declared correspond to the figures in the accounts. On the other hand, it is aimed in particular at checking the underlying documents (accounting documents): invoices, contracts, notarial deeds, receipts, bank statements, etc.
I do not know any case where the failure to legalize meant that Hacienda did not consider a simple printout from your bookkeeping as sufficient proof. In none of them did the Inspector even ask for it. Nor have I come across any cases in case law. On the contrary, the law explicitly states that you may provide evidence in any legal way. Providing legalized books is just one of them. Legalisation has no added value whatsoever in terms of proof, because the figures are ultimately only a reflection of the underlying accounting documents. As already mentioned, an entrepreneur only has a problem with the tax authorities if those underlying documents show a different picture than the returns submitted. Legalisation of potentially manipulated figures does not solve that problem.
Of course, if you still want all your books to be legalised, there is nothing against that. We leave that choice to our clients.
Roeland van Passel