Meaning of “expenses incurred to carry out activities that are against the law” cannot be construed broadly
The Corporate Income Tax Law states (article 15.f) that expenses incurred to carry out activities that are against the law are not deductible. The Supreme Court concluded in a judgment delivered on February 8, 2021 that this concept should be construed narrowly.
In its judgment, the Supreme Court examined the deduction for corporate income tax purposes of late-payment interest arising from tax auditors’ assessment reports and from a stay of enforcement of administrative decisions, while the Revised Corporate Income Tax Law (TRLIS) was in force, in other words before the current Corporate Income Tax Law (Law 27/2014, of November 27, 2014) came into force for years that commenced on or after January 1, 2015.
The court ended the debate over deduction of this item by concluding that this late-payment interest is deductible. Among other remarks it noted that:
In judgment 76/1990 delivered on April 26, 1990, the Constitutional Court had already found that late-payment interest is not a penalty, instead it serves only to compensate for or restore the loss caused in payment of the tax debt.
Late-payment interest does not appear on the list of nondeductible expenses in article 14 TRLIS. Namely:
It cannot be considered to be included in letter (c) of that article (fines, penalties and surcharges) because it is a form of compensation rather than a penalty.
Nor can it be considered to be included in letter (e) of the same article (gifts and gratuities) because its payment is required by the law and therefore there is no animus donandi or voluntary element in its payment.
Therefore, if recognized correctly in the accounts, it is a deductible expense (subject nevertheless to the limits laid down for finance costs).
Although, as mentioned, the court examined the ability to deduct the expense in periods while the TRLIS was in force, it also expressed its view on this issue for periods while the current Corporate Income Tax Law (LIS) is in force. Besides underlining that neither law bars deduction of these expenses, it reflected on whether now late-payment interest could be treated as nondeductible, because it falls within the new definition of expenses incurred to carry out activities that are against the law, defined in article 15.f) LIS.
The court was conclusive in its reply that late-payment cannot be considered to be included in that letter. And noted that this expression has to be construed narrowly, mentioning examples such as bribes and other similar types of conduct.
This conclusion may be reproduced in other areas such as, for example, the deduction of expenses in respect of compensation to directors, in which the tax authorities continue to stress that strict compliance with the law is necessary to ensure that they are able to be deducted.