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Spain: Crossfire in the Spanish tax authorities

Vicente BootelloJosé Ignacio Ripoll

In recent months we have been witness to a doctrinal battle still being fought by various administrative bodies regarding the interpretation of whether or not late-payment interest should be treated as a deductible expense for corporate income tax purposes.

The origin of the recent controversy was the decision handed down on May 7 2015 by the Central Economic-Administrative Tribunal (the TEAC) – the ultimate administrative authority on interpretation – in which it stated its new position on the deductibility of late-payment interest for corporate income tax purposes and concluded that, because late-payment interest is an expense incurred on the breach of a statutory provision and is compensatory by nature, it cannot be deductible. The main problem arises from the fact that the decision was based on the position taken by the Supreme Court in judgments referring to a much earlier corporate income tax law (in force until 2003), and that the TEAC decision itself referred to the legislation in force before the reform carried out by Law 27/2014.

The publication of this decision was followed by (i) the publication of a number of rulings by the Directorate-General of Taxes (DGT), and (ii) a report and clarifying note to said report by the State Tax Agency that seems to conclude, in summary, the following:

  • The current law lays down a general principle according to which all expenses per books are deductible unless otherwise stipulated by the law itself.
  • Late-payment interest is a finance cost from an accounting standpoint and, accordingly, it should, in principle, be deductible (up to the statutory limits on the deductibility of this type of expense).
  • Late-payment interest is not included among the nondeductible expenses expressly regulated in the Corporate Income Tax Law. It does not arise from the accounting for corporate income tax (not even where the assessment refers to such tax); it cannot be characterised as a gratuity; and it cannot be treated as an expense incurred on actions contrary to the legal system.
  • Lastly, as regards the timing of recognition of the expense, a distinction must be made between interest relating to the year in progress and interest relating to previous years, that is, interest relating to previous years will be deductible when it is recorded for accounting purposes (with a charge to reserves), provided that this does not give rise to lower taxation.

The foregoing does not serve to reduce the problem of legal uncertainty, given that the binding nature of the DGT rulings (as a manifestation of the principle of legitimate expectations) collides head-on with the binding nature, on all other administrative bodies, of the interpretation taken by the TEAC. In fact, the tax inspection is following the TEAC restrictive doctrine nowadays during tax audits of companies.

Though we believe the open interpretation of the DGT is more in line with the spirit and letter of the current law, we will have to wait for upcoming decisions of the TEAC before the denouement is made known to us, given that at present there is no safe harbour in which taxpayers can take cover from the crossfire of this latest doctrinal skirmish.

Vicente Bootello (; and José Ignacio Ripoll (
Garrigues, Madrid
Tel: +34 915145200

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