The Spanish Supreme Court clarifies when financial expenses are not gifts or donations

The Spanish Supreme Court (SC) has determined, in recent Court resolutions of July this year, the tax deductibility of financial expenses derived from loans to distribute dividends or purchase own shares.

In such resolutions, the controversial issue is to determine whether any accounted and formally proven expense that does not denote a direct and immediate correlation with entrepreneurial income must necessarily constitute a non-deductible donation, even if such expense does not strictly qualify as a gift or gratuitous donation.

✔ The tax auditor considered that financial expenses arising from loans obtained by a company for the purchase of its own shares and, subsequently, for the payment of a dividend could not be considered deductible.

✔ The State Attorney, in opposition to the taxpayer’s appeal, argued that such loans should qualify as a liberality, not based on the legal qualification of the contract between the company and a third party but on the overall transaction purpose, as it was not done in favor of the company leading to any income but of the shareholders.

✔ The SC highlighted that the expenses were not qualified as fraudulent or contrived with the sole purpose of obtaining any tax advantage and the tax authorities had not considered that they implied a shareholders’ remuneration either, since loan financial expenses do not have such qualification.

✔ The SC resolves that:

• The expenses have documentary evidence, are included in the company’s accounts, and respond to an onerous cause, not gratuitous, which is complying with the loans’ terms.
• In order to qualify the expenses from the tax point of view, the fact that the company did not use its own funds (voluntary reserves) but asked for a loan does not have any relevance.
• In relation to the correlation between the company’s expenses and income, it cannot be understood as the correlation that may exist between a concrete project that may report a particular income but with all the economic management of the company.
• Consequently, an expense correlated with the overall entrepreneurial activity can be considered tax deductible.