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V0639-17 14 March 2017 · SG de Impuestos sobre la Renta de las Personas Físicas Criterion in force
IRPF · condena en costas

Legal costs awards constitute a capital gain for the prevailing party

A taxpayer inquired whether the amount received from a legal costs award should be declared as a capital gain for Personal Income Tax (IRPF) purposes. The Directorate General of Taxes (DGT) ruled that such an amount is compensation that constitutes a capital gain, as it represents a credit in favour of the prevailing party.

The question raised

Given that it has been established in the professional engagement letter that, in the event of concluding the proceedings with a favorable judgment and an award of legal costs, the law firm "shall collect its professional fees from the defendant, with the client having nothing to pay for this concept in this case", the question concerns the procedure to rectify the tax self-assessment.

The DGT's ruling

The award of legal costs generates a credit in favor of the prevailing party and does not constitute professional income for the party ordered to pay. The amount received is restorative in nature regarding defense and representation expenses, which constitutes a capital gain pursuant to Article 33.1 of Law 35/2006. This criterion is maintained even if there is a clause in the engagement letter providing that the defendant shall pay the fees directly to the lawyer.

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