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V1256-24 31 May 2024 · SG de Impuestos sobre la Renta de las Personas Físicas Criterion in force
IVA · costas judiciales

VAT deduction on legal costs disallowed as they constitute compensation rather than consideration

A taxpayer inquired whether they could deduct VAT from a proforma invoice for legal costs following a court ruling against them. The Directorate-General for Taxes (DGT) ruled that the payment of legal costs constitutes compensation to the winning party and does not represent a taxable transaction for the losing party.

The question raised

Validity of a pro forma invoice, corresponding to the legal fees of the prevailing party, for the purposes of VAT deduction and deductibility for Personal Income Tax (IRPF).

The DGT's ruling

The payment of legal costs constitutes compensation to the prevailing party and not consideration for services rendered to the losing party. Therefore, there is no transaction subject to VAT for the party paying the costs, the issuance of an invoice in their name is not appropriate, nor can they exercise the right to deduction. For Personal Income Tax (IRPF) purposes, the losing party may substantiate the expense or loss through the means of proof admitted under Law.

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