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For several years now, the tax authorities have questioned the right to claim the tax credit for research and development activities and technological innovation under the Corporate Income Tax Law. In particular, they have repeatedly questioned whether the tax credit should be allowed in relation to software projects which generally fall within the field of technological innovation. They have supported their conclusions on ad hoc reports issued by Spanish tax agency’s own computing department.

Although those reports do not usually question whether software projects fall within technological innovation where the taxpayer has obtained reasoned reports from the Ministry of Science and Innovation (formerly the Ministry of the Economy and Competitiveness), the tax credit base is practically reduced to zero because it is considered that the costs associated with the projects generally do not fall within those included in “the tax credit base” under article 35.2.b).1 and 2 of the law. These paragraphs state that the following elements form part of the credit base:

a) Technological diagnosis activities to identify, define and guide advanced technological solutions.

b) Industrial design and production process engineering (including the conception and preparation of plans, drawings and media to be used to define the descriptive elements, technical specifications and operating characteristics needed for the manufacturing, testing, installation and utilization of products), among others.

For these purposes, tax auditors have been finding that the costs incurred in software projects, are either not included in any of the foregoing items, or only the part relating to “technological diagnosis” is included not the part relating to “development expenses” for the projects. The tax auditors’ conclusion is underpinned by the idea that where the law mentions “production processes” it means production processes in the manufacturing industry.

In a judgment on July 1, 2021 (appeal 120/2018), the National Appellate Court allowed, in opposition to this argument, (i) the technological innovation credit to be claimed for software projects in non-manufacturing industries (the particular case examined in the judgment involved banking software); and (ii) also allowed the tax credit base to include both diagnosis and project development expenses. It had already delivered a similar ruling in its judgment on May 12, 2021 (appeal 1087/2017), in which it stated that “it cannot be said either that the development of software for banking is restricted to technological diagnosis”.

The National Appellate Court also criticized tax auditors for basing their conclusions on technical reports making legal assessments, and which, indirectly, although they say they are discussing the tax credit base, are actually questioning whether software projects may be included in technological innovation, even where the taxpayer has produced the Ministry’s reports.

Later, in its judgment on July 7, 2021 (appeal 286/2018), also related to banking software, the National Appellate Court recalled that, although the Ministry’s reports only bind the tax authorities in relation to characterizing the activity as research and development or as technological innovation, it cannot be overlooked that in these reports the Ministry may also give its opinion on the expenses that form part of the tax credit base as an element of its “examination work”, within the meaning supported by the Supreme Court in its judgment on March 17, 2016 (appeal 2799/2013); and therefore, these reports have, in relation to this issue, “a value, a significance and an importance which cannot neither be ignored nor overlooked”.