The Supreme Court confirms that companies’ financial expenses are deductible in corporate income tax (IS)
The Court establishes that these amounts, such as interest on loans, are deductible expenses as long as they are related to the business activity
The Supreme Court confirms that companies’ financial expenses are deductible in corporate income tax (IS). The Court establishes that these amounts, such as interest on loans, are deductible expenses as long as they are related to the business activity.
Specifically, the Supreme Court’s ruling rejects that these expenses fall within the concept of “liberalities”. The Corporate Income Tax Law establishes that “donations and gifts” are not deductible. However, the Supreme Court denies that financial expenses are included within this consideration. The ruling establishes the deductibility of amounts accrued for a loan directly and immediately related to the exercise of the business activity.
“The interpretation of the concept of donations and gifts does not allow the inclusion of financial expenses which, as in this case, are documented, included in the accounts and clearly have an onerous and not gratuitous cause,” says Supreme Court judge Dimitry Berberoff, rapporteur of the ruling. “We are dealing with accounting expenses incurred in the course of business activity,” he adds.
The ruling thus rejects the criterion that the Tax Agency had been applying when making its assessments. The Tax Inspectorate considered that the interest on a loan obtained by the company to repay a part of the share premium to the shareholders could not constitute a deductible expense, as it was not correlated with the income, classifying it as a mere liberality.
“These expenses cannot be classified as non-deductible donations or gifts, nor can they be considered as a return on equity that should be excluded from the status of deductible expenses”, the Supreme Court replies. Thus, the Court establishes doctrine and concludes that “the financial expenses accrued for a loan that are directly and immediately related to the exercise of the company’s business activity, even if it is not related to a certain income, are deductible for the purposes of determining the taxable base for corporate income tax”.
For the Supreme Court, these amounts meet the general requirements for deductibility of the expense. “That is, accounting registration, allocation on an accrual basis, and documentary justification”, explains the ruling. The Supreme Court upholds this deduction, even if the company has its own resources and does not need any credit. One of the Administration’s arguments was precisely that, that these expenses were a “liberality” because the company could cover its needs with its own funds.
“To maintain that there was no need to undertake this loan operation because the available own funds (voluntary reserves) could have been used for the same purpose, lacks any relevance from the point of view of tax classification”, replies the Supreme Court. “In reality, the administration’s entire argumentation calls into question the company’s economic resource management decisions”, it adds.
The tax office argued that ‘the only reason for resorting to the loan is to make otherwise non-deductible financial expenses deductible’. According to the Tax Inspectorate, in this case, “it has not been demonstrated that the loan was necessary for a certain project or operation of the company’s economic activity, and there is no correlation between the expense (in this case financial) and the company’s income, which is ultimately the real reason why the expense is denied to be deductible.
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