24 April, 2016

Late payment interest and Tax Deductibility – PBS

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a penalty deriving from a tax audit assessment has a sanctioning function and cannot, therefore, be deducted from the taxable profit.

The Spanish General Directorate of Taxes (GDT), in its binding resolution V4080-15, of Dec. 21, 2015, has recognised the tax deductibility of late payment interest given their compensatory nature for the non payment of a tax debt within the legal term.

While the interest compensates the late payment of a tax debt, a penalty deriving from a tax audit assessment has a sanctioning function and cannot, therefore, be deducted from the taxable profit.

✔The GDT qualifies late payment interest as a financial expense and analyses the tax deduction of the interest, to the effects of determining whether there is any limitation set forth in Spanish Corporate income tax regulations.

✔In order to defend their tax deductibility, the GDT concludes the following:

  • Late payment interests are not expenses related to the Corporate income tax accounting.
  • They cannot be qualified as a gift or donation as the taxpayer does not have the so-called “animus donandi” or a voluntary attitude required in a donation, as interests are imposed by the legislative system.
  • They are not contrary to the legislative system: quite the opposite, the expense is imposed by such legislative system.

✔ Given their financial nature, interests are subject to the limits set forth in article 16 of Spanish Corporation Law: they cannot exceed 30% of the company’s operating profit (a sort of EBITDA, as defined by the tax Law) although, in any case, a tax deduction of 1 Million € is permitted.

✔ In relation to late payment interest corresponding to previous fiscal years, the GDT concludes that they are tax deductible in the fiscal year in which they are registered, for accounting purposes, providing that this practice does not lead to a lower taxation than the one that would correspond should they be registered according to their accrual.

✔ The GDT position in favour of the tax deduction of late payment interest in Spanish Corporation tax brings a new perspective for the benefit of Spanish taxpayers, specially taking into account that such tax deduction had been denied in recent (and surprising) Spanish judicial resolutions.

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