Payment of legal costs following a final judgment may be deducted as a capital loss

Individuals who are required to pay legal costs following a judicial resolution have received relevant confirmation regarding their tax treatment. The Dirección General de Tributos (DGT) has analyzed whether this disbursement can be accounted for as a capital loss in the income tax return.

What the DGT has ruled

The DGT determines that a sentence ordering the payment of legal costs constitutes a capital loss. This is because said payment represents a variation in the value of assets that does not have the nature of a consumption expense. The criteria establish that the loss must be attributed to the tax period in which the condemnatory judgment becomes final.

Furthermore, the body clarifies that the amount of the loss will exclusively be that which the taxpayer is required to pay, without affecting the calculation if other parties condemned in the same process have had to pay higher amounts. This loss is integrated into the general taxable base, subject to the compensation limits established in current regulations.

What this means for you

If you are a party to a judicial process and the final judgment imposes the payment of costs upon you, that amount should not be considered a current expense, but rather a reduction of your assets. This allows the disbursement to have an impact on your Personal Income Tax (IRPF) taxable base, provided that the requirement of the finality of the judgment is met.

It is fundamental to correctly identify the tax year in which you must declare this loss. It is not the moment the process begins, but the tax year in which the judgment becomes final and the payment occurs.

What you should do

In a situation of this type, it is necessary to:

• Verify the exact date on which the judicial sentence becomes final.
• Keep the judicial documentation and the proof of payment of the costs.
• Calculate the exact amount you are required to pay according to the resolution.
• Assess with a specialist the integration of this loss into the general taxable base to optimize your tax return.