The new Corporations Income Tax rules in force as from January 2015 has severely limited the tax deductions, specially non realized tax losses, such impairments. As a matter of fact, currently only two deductions are allowed: bad debts and the impairment of inventories.
Traditionally in Spain the bad debts allowance is limited to receivables and other credits which meet certain requirements. In this respect, no tax allowance is admitted for receivables from Public Entities, related entities and secured credits. In all these cases, the risk of default is thought to be limited, so the tax man just rejects the tax deduction. Other receivables are eligible for the bad debts allowance as long as they fall within the following categories:
- Overdue invoices aged at least 6 months
- When the customer or debtor is involved in an insolvency procedure, regardless the overdue period
- Litigious credits, i.e. those subject to a Court trial
The rew rules have introduced some modifications, although the changes are not far-reaching. One of the new rules is that receivables from long-term credit sales subject to the cash imputation system cannot be deducted for tax purposes. The rule makes sense; according tho the law profits from long-term credit sales -more than one year – can be recorded for tax purposes on cash basis, that is, when the sale is cashed in. However, from an accounting perspective, the profit is recognized when the sale is done, so these transactions create a deferred tax liability. Therefore, if the credit is not collected on due course and remains unpaid, the tax payer cannot claim a tax deduction because, as a matter of fact, the profit from the sale would not had been taxed yet. Surprisingly, this rule did not exist before.
Other noteworthy modification regards secured credits and receivables. Before, these credits were not allowed for tax deduction but the now the law remains silent about the matter. So even if a credit is guaranteed by, for instance, a bank making the event of default extremely unlikely the tax payer could treat the credit as a bad debt if it becomes overdue.
A second interesting modification relates to credits against related companies. If the related company is involved in a bankruptcy process then the creditor can consider the credit as a bad debt from the moment the Court opens the liquidation phase of the bankruptcy process. Before, the creditor should wait until the subsidiary was actually liquidated which could last a long time.
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