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V3112-14 18 November 2014 · SG de Impuestos sobre el Consumo Criterion in force
IVA · indemnización

VAT cannot be deducted from legal costs paid as compensation

A company enquired whether it could deduct VAT from a creditor's expenses following an agreement reached to avoid an attachment of assets. The DGT ruled that the payment of legal costs constitutes compensation and is not consideration subject to VAT between the parties.

The question raised

To whom does the deduction of the taxes incurred correspond, and how can the consultant justify the deduction when they have satisfied the expenses but the invoices are in the name of their creditor.

The DGT's ruling

The payment of court costs has an indemnification nature and does not constitute a transaction subject to VAT between the winning and the losing party. The recipient of the professional services (such as lawyers) is the party that wins the litigation, therefore the invoices must be issued in their name. Consequently, the party paying the indemnity cannot deduct the VAT nor request invoices in their name, as they are not the recipient of the services.

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