Business owners must prove the reality of operations to deduct expenses

The deductibility of expenses in Corporate Income Tax (IS) does not depend exclusively on the existence of documentary support. The Directorate General of Taxes (DGT) has specified that the justification of expenses is a matter of fact that requires proving the reality of the economic operations carried out by the company.

What the DGT has ruled

Through a recent binding ruling, the advisory body has clarified that, although business owners must primarily justify their expenses through invoices or substitute documents, the invoice does not constitute a privileged means of proof against the Administration. If the tax authority questions the veracity or existence of the operation, the taxpayer bears the burden of providing additional evidence demonstrating that the expense is real and linked to the economic activity.

The resolution is based on the General Tax Law (LGT) and the Corporate Income Tax Law (LIS), establishing that:

• The assessment of the documentation provided is the exclusive competence of the Administration.
• The justification of expenses must be carried out by any means admitted in Law.
• Mere possession of an accounting document does not exempt one from demonstrating the effective existence of the transaction.

What this means for you

For companies, this criterion implies that having correctly issued invoices is a necessary but not sufficient requirement to safeguard the deductibility of an expense. In the event of an inspection, the Administration may challenge the deductibility of a cost if it considers that the operation did not take place or lacks a real economic purpose, even if formal documentary support exists.

What should be done

It is fundamental for the company to ensure that every expense recorded in the accounts is backed not only by the invoice but also by elements that demonstrate the materiality of the operation. This includes maintaining records of service execution, delivery notes, contracts, or any other document that allows for corroborating that the transaction occurred in accordance with the commercial reality of the entity.