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V0124-22 24 January 2022 · SG de Impuestos sobre la Renta de las Personas Físicas Criterion in force
IRPF · condena en costas

No capital gains arise if legal costs award exactly covers incurred defence expenses

A taxpayer enquired whether a court order for legal costs incurred during litigation constitutes a capital gain for Personal Income Tax (IRPF) purposes. The Directorate General of Taxes (DGT) ruled that the prevailing party may deduct the expenses incurred during the proceedings from the amount received; therefore, if the award equals the expenses, no gain is realised.

The question raised

Inquiry regarding the impact of legal fees on the settlement of Personal Income Tax (IRPF).

The DGT's ruling

To determine the capital gain resulting from a legal costs award, the prevailing party may deduct from the amount received the expenses incurred due to the litigation. This deductible amount may reach, at most, the amount received, without exceeding it. If the legal costs award corresponds to the expenses incurred (professional defense fees), no capital gain shall have occurred.

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