Spanish Supreme Court clarifies the binding nature of the report of the Ministry of Science and Innovation in order to apply tax deduction for technological innovation

The Supreme Court has ratified the binding nature of the reports issued by the Ministry of Science and Innovation in relation to the application of deductions for technological innovation projects and associated expenses. It also limits the tax authorities' ability to contradict these reports by means of internal documents.

In its judgments of 8 and 9 October 2024 (Rec. 948/2023, 1635/2023 and 1633/2023), the Supreme Court annulled the National High Court's judgments which upheld the reports of the IT Support Team (EAI) of the tax authorities' internal unit. These reports had contradicted the binding report issued by the Ministry of Science and Innovation on technological innovation for the purposes of applying the corporate income tax (CIT) deduction for research, development and technological innovation (R&D&I) activities.

Legal background to the cases

Article 35.4.a) of the Consolidated Text of the Corporate Income Tax Law (CTCIT) - applicable until 2014 - established that, for the purposes of the R&D&I deduction, taxpayers could provide a reasoned report from the Ministry of Science and Technology regarding compliance with the scientific and technological requirements for classifying R&D&I activities. The current law includes a similar provision, which refers to the competent ministry depending on the subject matter.

However, in recent years the tax authorities have been rejecting the application of the technological innovation deduction to software projects on the basis of reports prepared by the EAI, even when the taxpayer had a binding report from the relevant ministry. Although these internal reports generally did not question whether the activity could qualify as technological innovation, they concluded that certain expenses could not be included in the deduction base, as they did not meet the definition of "deduction base" set out in Article 35 of the Corporate Income Tax Law 27/2014 of 27 November (CIT Law).

Supreme Court's conclusions

In the judgments analysed, the Supreme Court concludes:

• An administrative ruling that recognises a right - such as that a project is considered R&D&I and that the investment made should be deductible in the CIT quota - and that is binding by law for the issuing administration in a broad and all-encompassing sense, cannot be contradicted by another contrary report from the administration itself.
• Although in extremely exceptional situations of arbitrary or illogical assessment - which are not present in the cases analysed in the judgments - the tax authorities should argue such a contradiction by means of evidence, evidence generated internally within its own premises is not acceptable.
• Specifically, the IAC report does not come from an independent body of the tax authorities, nor is it drafted by officials who have a degree of independence or functional autonomy that allows them to be impartial in their conclusions, especially when they contradict a binding report.
• Thus, the report mentioned in article 35.4 of the CTCIT is binding for the tax authorities in all its aspects. This means that it refers not only to the qualification of the project as part of the R&D&I concept, but also to the investments and expenses which, submitted to the consulted body, have received a positive assessment. Therefore, this type of report cannot be refuted or ignored by the tax authorities, neither in the qualification of the projects as worthy of tax deduction, nor in relation to the expenses included in the project and presented in the consultation.

Based on this reasoning, the court determined that the tax agency's actions contravened the principles of legal certainty and legitimate expectations. This action undermines the legislator's objectives regarding the deduction for R&D&I activities, which are to encourage this type of activity and to promote investment in projects that improve the updating and competitiveness of companies.

Therefore, the three judgments uphold the respective appeals, annul the judgments of the National High Court and declare null and void the settlements that were challenged at the time, which denied the R&D&I deduction in the CIT. Furthermore, they recognise the appellant companies' right to the R&D&I deduction, as declared by them in their self-assessments.

Osborne Clarke comment

In our view, these new rulings are of great value for companies, especially in the field of research and technological development, as they put an end to a controversy that had been confronting companies and the tax authorities.