Withdrawing cash from a bank account is not a deductible expense in Corporate Income Tax

A recent binding ruling from the Directorate General of Taxes (DGT) has clarified the tax nature of cash withdrawals made from an entity's bank accounts. The analysis focuses on determining whether this movement of funds can be treated as a deductible expense in Corporate Income Tax (IS).

What the DGT has ruled

The DGT has ruled that withdrawing cash from an entity's account does not constitute a tax-deductible expense. This criterion is based on the application of Articles 10.3 and 11 of the Corporate Income Tax Law (LIS). According to the regulations, the tax base is calculated starting from the company's accounting result.

For an amount to be considered an expense, there must be a decrease in the company's net equity. In the case of a cash withdrawal, the money simply changes location (from the bank account to cash on hand), so there is no real reduction in the entity's equity. Since no expense is recorded and no such decrease in equity occurs, there is no basis for a tax deduction.

What this means for you

This criterion has a direct impact on the financial management of companies. If an entity withdraws funds from its bank account with the intention of considering them a loss or an expense because they cannot be used in the business activity, the Tax Administration will not recognize such a deduction.

It is fundamental to distinguish between the availability of funds and the loss of them. The mere fact that cash is not used in the economic activity does not transform the operation into a deductible expense if the company's net equity remains intact.

What should be done

In light of this resolution, companies must ensure that their accounting faithfully reflects the reality of treasury movements. It is necessary to:

• Correctly differentiate between cash movements and real operating expenses.
• Verify that any deduction applied in Corporate Income Tax is supported by an actual decrease in net equity.
• Assess each accounting situation individually to avoid errors in determining the tax base.