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V0288-16 26 January 2016 · SG de Impuestos sobre las Personas Jurídicas Criterion in force
IS · ejecución hipotecaria

Impairment of credit against a related party is deductible if insolvency is judicially declared

A company inquired whether it could deduct the amount paid to a bank following a mortgage foreclosure on assets pledged as collateral for a loan to a related company in liquidation. The DGT ruled that the deductibility of credit impairment depends on whether the related entity's insolvency has been judicially declared.

The question raised

Whether the amount paid by the consulting entity to the credit institution through judicial mortgage foreclosure is deductible in Corporate Income Tax for the fiscal year in which the guarantees on the real estate are executed, due to the impossibility of collecting the credit from Y, a company in liquidation.

The DGT's ruling

The expenses or income from a mortgage foreclosure have tax effectiveness according to their accounting record. Upon the occurrence of the foreclosure, the asset must be derecognized and a result must be recognized for the difference between the fair value and the book value. Regarding the right of collection against the related entity, the impairment shall be tax-deductible only if the insolvency of said entity is judicially declared, a situation that is met if the company is in the liquidation phase.

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