Supreme Court rules on deductibility of expenses from statute-barred tax years in Spain

Spain's Supreme Court Ruling 518/2024, of 22 March 2024, which was handed down on appeal, has confirmed that expenses recognised in a tax year subsequent to the year in which they accrued can now be deducted – even if they were accrued in a statute-barred year.

Article 11 of Law 27/2014, of 27 November, on Corporate Income Tax provides that the recognition of an expense in a year subsequent to that in which it was accrued can be deducted in the year in which it was recognised for accounting purposes, provided that this does not result in lower taxation than that which would have been applicable if it had been recorded in the year in which it was accrued.

Tax authorities' position

Both the Directorate General for Taxation (Dirección General de Tributos) and the Central Economic and Administrative Court (Tribunal Económico-Administrativo Central) understand that the statute of limitations operates as a limitation to the deductibility of expenses; that is, an expense that is recognised in a year subsequent to the year in which it was accrued cannot be deducted when the year in which the accrual took place is statute-barred.

In the case heard by the Supreme Court, the company detected some invoices from 2009 and recorded them in the 2016 tax year. The tax authorities considered that the expense allocated to the 2016 tax year was non-deductible because the 2009 tax year was statute-barred.

Supreme Court correction

The Supreme Court corrects the doctrine of the tax authorities and separates the statute of limitations from the concept of lower taxation referred to in article 11 of Law 27/2014 on Corporate Income Tax. Thus, if it is determined that there is no lower taxation without taking into account the statute of limitations, the expense recognised in a subsequent year can be tax deductible because it is permitted by the tax law, and the accounting regulations allow it to be recorded in a subsequent year (Third Ground of Law).

However, in order for an expense to be tax deductible, it must comply with the accounting regulations. In this sense, Valuation Standard 22 of the Spanish General Accounting Plan, which regulates changes in accounting criteria, errors and accounting estimates, establishes that if an error is detected, it shall be recorded, as a general rule, in the year in which it was detected by posting it to the reverse account. In addition, the change in the accounting criteria or error must be stated in section 2 of the notes to the financial statements and be reflected in the statement of changes in equity.

Osborne Clarke comment

According to the Supreme Court's doctrine, companies have the possibility, until now denied by the tax authorities, to review and detect expenses (including impairments or provisions) that were not recorded at the time and, once correctly recognised in the accounts, they can be charged as a tax-deductible expense even if the year in which the expense was accrued is statute barred.