Creditors cannot deduct unpaid debts without proving judicial uncollectibility

The possibility of reducing the Personal Income Tax (IRPF) taxable base by declaring capital losses for unpaid debts has been clarified by the Tax Administration. Not every non-payment of a debt allows the taxpayer to recognize a loss in their income tax return.

What the DGT has ruled

The Dirección General de Tributos (DGT) has determined that the existence of a credit right, in itself, prevents the consideration of a capital loss. The simple fact that a debtor fails to meet their payment obligations does not automatically generate the right to a deduction.

For the Administration to accept the existence of a capital loss, the creditor must prove that the credit is judicially uncollectible. Likewise, the specific circumstances established in current regulations must occur, such as:

• The effectiveness of a formalized debt waiver (quita).
• The conclusion of insolvency proceedings without the credit having been satisfied.

In the absence of these evidentiary elements, the credit right continues to exist in the holder's assets, which prevents the recognition of the loss.

What this means for you

If you are a natural person who holds credit rights and faces non-payment, you cannot take for granted the deductibility of that amount in your tax return based solely on the debtor's breach. The regulations require the loss to be real and definitive from a legal standpoint.

This implies that, as long as the credit is not declared uncollectible through a judicial resolution or an insolvency event is not formalized under the assumptions of the LIRPF, the amount will continue to be part of your assets, even if it is not cash.

What you should do

In situations of non-payment, it is necessary to evaluate the debtor's legal situation. It is fundamental to verify whether the non-payment fits the assumptions of Law 35/2006 or if insolvency proceedings have been initiated that allow for the proof of the loss. It is recommended to assess each particular situation to determine if the requirements of letter k) of article 14.2 of the LIRPF are met before proceeding to impute the loss in the tax return.