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V3264-17 21 December 2017 · SG de Impuestos sobre la Renta de las Personas Físicas Criterion in force
IRPF · condena en costas

Legal costs awarded as damages are considered capital losses; loan interest for payment is non-deductible

A taxpayer has enquired about the Personal Income Tax (IRPF) implications of being ordered to pay legal costs and the interest on a loan taken out to cover them. The Directorate General of Taxes (DGT) has ruled that such an award constitutes a capital loss, but the interest on the loan has no tax implications.

The question raised

Impact on Personal Income Tax (IRPF) of the payment of legal costs and the interest on the loan requested for their payment.

The DGT's ruling

The award of legal costs against the losing party constitutes a loss of assets, as it represents a variation in the value of their assets. However, the interest on the loan requested to cover said costs has no impact on Personal Income Tax (IRPF). This is because such interest constitutes financing expenses for a disbursement which, being a loss of assets, is assimilated to consumption income pursuant to Article 33.5.b) of the Personal Income Tax Law.

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