Technological Innovation tax credit: A new criterion of the Spanish National Court

In a recent Sentence, the Spanish National Court has changed its point of view and now considers that software development expenses do not form part of the basis of the Technological innovation (TI) tax credit, even though the taxpayer has a Reasoned Report from the Spanish Ministry of Economy and Competitiveness.

Such change of criterion is justified in the refinement of the concept of production processes engineering, after analysing the new arguments provided by experts from the Computer Support Team of the Large Taxpayers Central Office

• Spanish Corporate Income Tax Law only admits as a basis of the IT tax credit certain cases that do not specifically include software. The Spanish National Court Sentence analyses if software programs may potentially fit in the definition of:

  “2. Industrial design and production processes engineering.”

• The Sentence considers that “software programs are specifically excluded as an industrial design activity in Article 1.2.b) of Law 20/2003 for the industrial design legal protection, which is why we shall not expand on arguing about the non-fitting of the controversial expenses in such concept.”
• Focusing the discussion on the “production processes engineering”, the Sentence argues that:
  • i. The binding reasoned reports issued by the Ministry of Economy and Competitiveness bind in relation to the activities qualification, but it is the Spanish tax authority’s duty to quantify the basis of the tax credit.
  • ii. Production processes engineering is a subject area specialised in business processes engineering that is focused on the context of production but does not include the development of software tools, which is a complementary activity but not the activity of production processes engineering.

  However, it admits considering as production processes engineering a project consisting of two phases: (i) definition of processes; and (ii) creation or improvement of software tools.

• Pending the Spanish Supreme Court’s decision on these cases, taxpayers have now to face the possibility that the Spanish tax authorities review the expenses considered as a basis of the IT tax credit, when these include software development expenses, even when they had the comfort of a reasoned report issued by the Ministry of Science and Competitiveness.