Deductibility of late-payment interest for corporate income tax purposes
The Central Economic-Administrative Tribunal (TEAC), in its Ruling of May 7, 2015, rejected the deductibility of late-payment interest for corporate income tax (IS) purposes on the grounds that these expenses are incurred as the result of non-compliance (and are therefore not necessary) and serve a compensatory function.
The Directorate General of Taxes (DGT), however, in its Ruling of February 2, 2015, stood by the traditional approach, accepting that late-payment interest should be treated as a deductible expense. In a further ruling of December 21, 2015, the DGT has reiterated its view that these expenses are deductible.
Specifically, the DGT has ruled that since late-payment interest is considered a finance cost under accounting legislation, it is an accounting expense and must be classed as deductible, except in any of the situations envisaged in article 15 of the Corporate Income Tax (IS) Law. The DGT does not accept that these are expenses deriving from the bookkeeping of IS, and affirms that they cannot be considered gratuitous because they are not dependent on volition, and neither can they be classed as expenses deriving from unlawful acts since it is the legal system itself which has imposed them.
The DGT therefore concludes that late-payment interest should be treated as a deductible expense although it should, as a finance cost, be subject to the limitations on such costs established in article 16 of the LIS (as a general rule, net financial costs are only deductible up to a limit equal to 30% of the operating profit for the year, although this limitation only applies over and above 1 million euros).
In short, the TEAC and the DGT have adopted wholly opposing views in relation to this question. The Tax Agency, in view of the debate which has arisen, has issued a Report dated March 7, 2016 setting out its position.
Which side is the Tax Agency on? Its understanding appears to be that late-payment interest deriving from tax assessments raised and other review proceedings carried out (such as verifications of data, limited reviews, etc.) cannot be considered deductible.
Prior to the publication of this Report, the first assessments raised subsequent to the DGT’s ruling of December 21, 2015—in which the Tax Agency treated these expenses as non-deductible—had already come to our attention, and now that the Report has been published we expect to see, in the coming months, further confirmation of the position adopted with respect to the deduction of late-payment interest paid in years which remain open to inspection.
In short, this is a controversial issue since even within the Tax Administration itself there are those for and those against the deductibility of late-payment interest. Each taxpayer must therefore adopt whatever position it considers most appropriate in the circumstances. If it does opt to treat this interest as deductible and this is disputed in an inspection, no penalty should be imposed such the treatment applied would be based on a reasonable interpretation of the rule.
Mónica Rendé
Garrigues Tax Department
