Individuals shall impute legal costs as a loss in the year the final judgment is issued

The tax treatment of costs derived from a judicial process has been defined following the recent resolution of the Dirección General de Tributos (DGT). The ruling addresses the exact moment when an individual can recognize the payment of procedural costs as a capital loss for their Personal Income Tax (IRPF) return.

What the DGT has resolved

The DGT establishes that the payment of procedural costs should not be considered a consumption expense, but rather a genuine capital loss. Since an alteration in the taxpayer's assets occurs, the regulations require determining the correct tax period for its declaration.

The technical criterion indicates that the asset alteration is understood to have occurred in the tax period in which the condemnatory sentence has become final. Therefore, it is not the moment of the economic disbursement that determines the imputation, but the moment when the judicial resolution is no longer subject to appeal.

What this means for you

If you have been ordered to pay in a judicial process and must settle the costs of the opposing party, this amount has a specific treatment in your tax return:

• Nature of the concept: Money allocated to costs is treated as a capital loss.
• Timing of declaration: You must integrate this loss into your general taxable base in the tax year in which the sentence becomes final, regardless of when the actual payment is made.
• Compensation: By being integrated into the general taxable base, this loss will be subject to the compensation rules established in the IRPF Law.

What is advisable to do

In a situation of judicial litigation, it is necessary to maintain rigorous monitoring of procedural timelines. It is fundamental to identify the exact date on which the sentence becomes final to ensure that the imputation of the loss is carried out in the corresponding fiscal year, avoiding errors in the tax settlement. Given that each legal situation is unique, it is recommended to assess your specific case to determine the exact impact on your taxable base.