The deductibility of late-payment interest for corporate income tax purposes

In a recent ruling, the Supreme Court has established the criterion that late payment interest is considered a tax-deductible expense for corporate income tax purposes

The Supreme Court, in its Ruling 150/2021 of 8 February last, has ruled on appeal establishing the criterion of deductibility of tax late payment interest, both that required in the settlement made in a verification procedure and that accrued due to the suspension of the execution of a contested administrative act. This ruling coincides with the pronouncement of the Directorate General for Taxation in its binding consultations V4080/2015 and V0603/2016. However, this issue had been a source of litigation due to the rejection by the audit bodies of the deductibility of late payment interest.

This ruling analyses the rules regulated in the Consolidated Text of the Corporate Income Tax Law approved by Royal Legislative Decree 4/2004 and in the current Corporate Income Tax Law 27/2014, and the conclusions reached by the High Court are as follows:

• The taxable event will be constituted by the income obtained by the taxpayer, whatever its source or origin, and the taxable base will be determined on the basis of the accounting result which is corrected, in certain cases, in the specific precepts contained in the regulation.
• With regard to non-deductible expenses, the ruling focuses on the following groups:
  • Fines and criminal and administrative penalties, surcharges and surcharges for late filing without prior notice.
  • Donations and gifts.
  • Expenses for actions contrary to the legal system.
• In accordance with the regulation of the General Tax Law in articles 25.1 and 26.1, as well as in accordance with Constitutional Court ruling 76/1990, late payment interest is an ancillary benefit intended to compensate for the non-fulfilment of an obligation to give, or rather, for the delay in its fulfilment, and is therefore compensatory in nature, and cannot be included in the section on fines and penalties or donations or gifts, as their payment is not voluntary.
• With regard to the costs of actions in breach of the law, it is understood that interest for late payment cannot be equated with any breach of the law, as this would be an interpretation contrary to its purpose.

As it is not possible to subtract a clear and concise application with respect to the deduction of late payment interest, the Second Section of the Contentious-Administrative Chamber of the Supreme Court understands that we must abide by what follows from the accounting regulations, specifically the resolution of 9 February 2016 of the Accounting and Auditing Institute , which in its article 18.3 provides that:

• Interest for the current year shall be accounted for as a financial expense, which shall be shown under the heading “Financial charges” in the profit and loss account.
• Interest and contributions relating to all previous financial years shall be entered in the accounts as a charge to a reserve account if such a provision should have been recorded in a financial year but has not been made. It is for these reasons that the Supreme Court considers that late payment interest is connected with the exercise of the business activity and, consequently, it will be deductible.

Thus, insofar as the accounting regulations consider late payment interest as financial expenses, both those accrued in the year, which will be recorded in the profit and loss account, as well as those accrued in previous years, which will be recorded with a charge to reserves, will be a tax-deductible expense, subject to the limits on the deduction of financial expenses established by article 16 of the LIS.

The same applies to suspensive interest required for delays in payment as a result of claims and appeals, both administrative and judicial.

It seems that, after several years of dragging out this issue, the doubts should finally be settled and the deductibility of late payment interest resolved.