Personal Income Tax withholdings for Corporate Income Tax purposes: doubts and guidelines to be borne in mind
When the time comes to submit tax returns, doubts or questions that we had not thought about until then often crop up. For example, in the case of assessments of personal income tax withholdings and prepayments, does the tax charge generate a deductible expense for corporate income tax purposes?
The answer should depend on whether or not the company has the right to bring an action for recovery of the tax charge against employees (regardless of whether or not they continue to work for the company). Thus, if this right does not exist, an expense would arise that should be deductible, and if it does exist, what would arise is an account receivable which will give rise to a non-deductible expense if the amount is not collected (for justified reasons) or the relevant provision is made to the allowance for bad debts beforehand. The Spanish courts (in the civil, judicial review and even labor jurisdictions) have appeared to support this view and in general tend to hold that the right to bring the action for recovery exists. However, a decision was issued recently which held that the amount can never be recorded as a deductible expense and, therefore, does not generate a deductible expense at the company.
Indeed, in a decision handed down on April 2, 2014, the Central Economic-Administrative Tribunal confirmed this view and held that (i) if the company decides not to recover the tax charge from the employee, a gratuity arises, which is an expense that cannot be deducted for corporate income tax purposes; (ii) but also that even if the company tries to collect the amount but does not manage to do so, for example, because the employee’s debt is statute-barred, an expense will not arise because the expense resulting from the remuneration paid previously was recorded at that time and cannot be increased by the fact that the company assumes a tax charge vis-à-vis the tax authorities.
This is a debatable criterion since it moves away from the concept of income that defines the taxable event. Moreover, the gratuity concept should be restricted to payments that are truly unrelated to the corporate activity and arise from an authentic animus donandi.
These and other matters have been discussed in our May tax newsletter prepared by our specialists in this practice area.
Garrigues Tax Department