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V2086-20 23 June 2020 · SG de Impuestos sobre la Renta de las Personas Físicas Criterion in force
IVA · deducibilidad

VAT deductibility and legal defence compensation depend on recipient status and business activity

An architect inquired whether they could deduct VAT on legal defence services paid by their insurer and how compensation for legal costs is taxed. The DGT ruled that VAT deductibility depends on the actual recipient of the service under the insurance contract, and that compensation for defence expenses constitutes income from professional activity.

The question raised

Taxation under VAT and Personal Income Tax.

The DGT's ruling

Regarding VAT, the recipient of the service shall be the insurance entity or the consultant depending on the contractual agreements; the recipient may deduct the tax in accordance with the general rules. Regarding Personal Income Tax, legal defense expenses for professional actions comply with the principle of correlation with income and are deductible. The compensation for these expenses must be classified as income from economic activity.

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