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V0877-18 3 April 2018 · SG de Impuestos sobre las Personas Jurídicas Criterion in force
IS · costas judiciales

Legal costs are recognised upon accrual and are not subject to VAT

A company has requested clarification on the tax treatment of income received from legal costs regarding Corporate Income Tax (CIT) and VAT. The Directorate-General for Taxes (DGT) ruled that for CIT purposes, these are recognised based on accounting accrual, and that the recovery of legal costs does not constitute a transaction subject to VAT.

The question raised

What would be the taxation of the amount received in Corporate Income Tax and in Value Added Tax.

The DGT's ruling

In Corporate Income Tax, income from legal costs must be attributed to the fiscal year in which they accrue, in accordance with accounting regulations. Regarding VAT, the collection of costs is compensatory in nature and does not constitute a transaction subject to the tax; therefore, there is no pass-through of VAT to the losing party. The recipient of the professional services (lawyers, court representatives) is the winning party, not the party paying the costs.

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