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Tuesday, July 16, 2024
HomeLatest NewsOpinion | Is late payment interest deductible in personal income tax?

Opinion | Is late payment interest deductible in personal income tax?

Date: July 16, 2024 Time: 21:11:33

Depend. If the taxpayer earns income from work or capital (dividends, rents…), the payment of late payment interest (art. 26 LGT) associated with the practice of a settlement in a tax inspection procedure will inevitably go to the bucket of the trash. The interest will not be deductible but rather an application of income without fiscal significance (a private consumption).

On the contrary, if the income comes from the exercise of an economic activity (professional or business), the interest will be considered deductible expenses and will be restored from the tax base. The Supreme Court –TS (judgment of July 24, 2023) has just established the following doctrine (FJ 4): “For the purposes of the Personal Income Tax, and in cases in which the taxpayer develops an economic activity , late payment interest, whether those required in the liquidation carried out in a procedure for verifying taxable income of natural persons related to the development of their economic activity, or those accrued by the suspension of the execution of the contested administrative act. , are considered a tax-deductible expense and, given their nature as financial expenses, will be subject to the limits on deductibility contained in article 16 of the Corporate Tax Law, also applicable to personal income tax. .

Perhaps this doctrine breaks the principle of fiscal neutrality by discriminating against taxpayers according to the source and legal classification of their income. For example, the doctrine is holy water for the leases of real estate classified by law as another modality of the exercise of an economic activity, while it is a curse for the lessors of the same assets if – as happens in most of the cases – the income obtained legally comes from real estate capital.

But let’s return to the quantitative restrictions of the deduction referred to in the ruling of July 24, 2023. The limit of the deduction will be 30% of the operating profit for the year. In any case, financial expenses that do not exceed the annual figure of one million euros will be deductible. Expenses not deducted by the expressed legal limitation may be deducted in subsequent tax periods.

With the ruling of July 24, 2023, the “jurisprudential gap” that has existed until now on the possibility of deducting late payment interest in personal income tax is put to an end. Until now, there was only judicial doctrine on late payment interest in the field of Corporate Tax (TS ruling of February 8, 2019). The TS doctrine is based (FJ 3) on article 28.1 of the Personal Income Tax Law, which, to determine the net return from economic activities, refers us to the Corporate Tax regulations. And what do the corporate tax regulations say about the requirements and conditions for eligibility of the expense to be deductible? Basically:

1st.- The accounting registration of expenses is essential, since the results subject to the Tax will be those deducted from the companies’ accounting, with the assessed adjustments specifically mentioned in the Tax Law. To include delay expenses in the profit and loss account, it is essential to refer to the valuation rules of the General Accounting Plan.

2nd.- The expense must not be expressly excluded as deductible from the base by the Corporate Tax Law. It is a requirement that it meets the default interest arising from an administrative settlement in a verification procedure (in this case due to the irregularities committed by the company in the VAT) tion as it has been challenged by the affected party.

3º.- Expenses must be correlated with the company’s income and be connected to the company’s activity. A condition that the TS declares satisfied by default interest.

The interests are not punitive in nature (which would require an express legal provision). Its nature is merely compensatory for the damages suffered by the Administration as a consequence of the untimely payment of the settlement. They will repair the damage caused by the delay in the payment of tax revenue. Furthermore, the chargeability of late payment interest has pro-future effects, since they try to dissuade taxpayers from sailing the ship of late payment again.

* This website provides news content gathered from various internet sources. It is crucial to understand that we are not responsible for the accuracy, completeness, or reliability of the information presented Read More

Puck Henry
Puck Henry
Puck Henry is an editor for ePrimefeed covering all types of news.
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