Deductibility of interest on late payment for taxpayers engaged in economic activities

Both late payment interest resulting from a settlement made in an income verification procedure relating to the development of the activity, and the interest accrued due to the suspension of the execution of the contested administrative act, is a deductible expense for personal income taxpayers who carry out an economic activity. As they have the legal nature of financial expenses, they are subject to the deductibility limits of the Corporate Income Tax Act.

Interest expense on late payment interest paid by the tax administration

The Supreme Court considers its doctrine on the deductibility of late payment interest resulting from certain acts of the tax administration to be applicable to taxpayers who carry out an economic activity. This conclusion is based on the following reasons:

1.Interest on tax arrears is classified as a financial expense in its legal sense, taking into account the case law of the Constitutional Court and its accounting classification, there being a positive rule that binds tax legislation (accounting law), unless the latter expressly establishes a different classification.

These are not of a punitive nature but exclusively compensatory or restorative in nature for the damage caused by the delay in payment of the tax debt. They are, therefore, specific compensation for the financial cost to the tax administration of not being able to dispose on time of sums of money legally owed to it. This being the case, its classification is none other than that of a financial expense, so that if the legal requirements are met – justification, accounting records and correlation with revenue, its deductibility cannot be questioned.

2.In order to determine the net return on economic activities, whether these expenses can be included among those that are non-deductible, since, otherwise, in the tax sphere, the accounting rule would be the same as that established by the accounting rule. In this regard, the Supreme Court has already stated that tax late payment interest cannot be included in any of the cases of non-deductibility provided for in the Corporate Income Tax Act.

3.For the purposes of determining the net income from economic activity, it cannot be said that this interest is not correlated with income, because it is connected with the exercise of the economic activity and should therefore be deductible.

Consequently, they are classified as financial expenses and do not fall into any of the possible categories of non-deductible expenses under the Corporate Income Tax Act. Interest on tax arrears should be considered as a tax-deductible expense.

Based on the foregoing, the SC concludes that, for personal income tax purposes and in cases where the taxpayer carries out an economic activity, late payment interest, whether it is demanded in the settlement carried out in a verification procedure or accrued due to the suspension of the execution of a contested administrative act, is considered a tax deductible expense and, given its nature as a financial expense, is subject to the deductibility limits contained in the Corporate Income Tax Law and also applicable to personal income tax.

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