Impairment losses on related-party receivables require insolvency liquidation phase

The correct determination of the taxable base for Corporate Income Tax (IS) requires a rigorous analysis of the deductibility of certain accounting expenses. A recent binding ruling from the Dirección General de Tributos (DGT) clarifies the tax treatment of impairment losses on receivables and provisions for liabilities, establishing differentiated criteria depending on the nature of the relationship with the debtor.

What the DGT has ruled

Regarding impairment losses on receivables, the administration establishes that the tax treatment varies depending on the relationship between the parties:

• Related entities: In the case of related debtors, the loss will only be deductible if the debtor is in an insolvency proceeding that has reached the liquidation phase.
• Non-related entities: For debtors without a relationship, deductibility is conditioned on strict compliance with the insolvency scenarios provided for in Article 13.1 of the Law on Corporate Income Tax (LIS).

Regarding provisions for liabilities, the DGT indicates that they will be deductible as long as the requirements of accounting recognition, accrual, and justification are met, and provided that the expense is not specifically excluded by Article 14 of the LIS.

What this means for you

For companies, this criterion implies that not every accounting provision for impairment of receivables automatically translates into a deductible tax expense. If your company holds receivables from entities within the same group or related parties, the mere insolvency of the debtor does not guarantee deductibility; it is imperative that said debtor is in the insolvency liquidation phase.

Likewise, the management of provisions for liabilities must align with accounting and tax regulations to prevent the Administration from considering these amounts as non-deductible expenses at the time of the tax settlement.

What should be done

It is necessary to perform exhaustive monitoring of the financial situation of related debtors to identify the exact moment when the loss becomes tax-acceptable. In the case of provisions, it must be ensured that the documentation justifying the accrual and the obligation to pay is solid and complies with the requirements of the Law on Corporate Income Tax and the General Accounting Plan.