According to the latest Supreme Court ruling dated October 24, 2023, deductions that were not claimed in a given tax year due to an error may be included in tax returns filed within the remaining period during which they may be claimed, without having to amend the original tax return for the year in which the right to the tax incentive arose.
Companies may apply deductions not claimed in a given fiscal year in subsequent fiscal years, up to a limit of 15 years (18 years for R&D). Therefore, this Supreme Court ruling rejects the TEAC’s approach regarding the treatment of deductions not claimed in prior fiscal years and makes it clear that the initial approach taken by the Tax Administration—which was more beneficial to taxpayers—may be reinstated.
Guidelines through 2022:
Let’s set the scene. Before 2022.
There have been instances where companies, whether by mistake or due to a lack of knowledge, failed to claim certain deductions to which they were entitled on their corporate income tax (IS) returns. Therefore, until 2022, the General Directorate of Taxes (DGT) allowed for the correction of such errors in two different ways:
- Amendment. Amending the corporate income tax return initially filed, provided that the statute of limitations has not expired (4 years).
- Subsequent deduction. Or by including the deduction on the corporate income tax return for a subsequent fiscal year. In this case, the deduction may be included within the time limit established by regulation for carrying forward deductions not applied due to insufficient tax liability (this time limit begins in the initial fiscal year in which the right to apply the incentive arose). According to Article 39 of the Corporate Income Tax Law (LIS), companies have 15 years to claim a pending and unclaimed deduction (18 years if it is for R&D).
Example: According to the AEAT, if a company did not claim a deduction on its 2022 corporate income tax return for hiring workers with disabilities to which it was entitled:
- That company has until July 25, 2027, to amend its 2022 corporate income tax return and include the deduction.
- Alternatively, you have until the 2037 corporate income tax return (15 years later, which is the deadline for claiming this incentive) to include the deduction on one of your subsequent corporate income tax returns.
Change in the Treasury’s criteria for 2022:
However, the Central Economic-Administrative Court (TEAC), in its ruling of March 23, 2022, established a new standard under which it held that, in the event of an omission of a deduction, the only option was to amend the tax return for the original tax year. Consequently, this criterion was highly controversial and detrimental to businesses, since if the initial tax return is already time-barred by the time the error is detected, the deduction is lost.
Continuing with the previous example, you have until July 25, 2027, to amend your 2022 income tax return and either claim the deduction or leave it pending. After that date in 2027, you can no longer request an amendment to the 2022 corporate income tax return, and therefore the unallocated (and/or unapplied) deduction would be forfeited.
Change in Criteria According to the Supreme Court:
As a result, the Supreme Court, disagreeing with the TEAC’s ruling, has issued a judgment in favor of the companies.
In this specific case, involving a claim for a deduction for R&D expenses that the company did not report on its corporate income tax return for the fiscal year in which the expenses were incurred, the court ruled as follows:
- It allows for the possibility of claiming the tax credit on tax returns filed over the next 18 years (starting from the year the right to the deduction arose).
- Therefore, the company is not required to amend the initial self-assessment in order to benefit from the incentive (although it may do so if the statute of limitations on the initial self-assessment has not yet expired). For this reason, this criterion should apply to all other tax deductions, not just those related to R&D.
Consequently, and in light of this ruling, we believe that the AEAT must take this ruling into account and return to its original criteria, so that taxpayers can claim deductions that were not claimed at the time (due to error or oversight), even if the statute of limitations has expired (4 years ago), while respecting the 15- or 18-year limits as applicable, without having to amend a previously filed tax return.
Our tax department analyzes each specific case to provide the best solution. Contact us, and we’ll offer you the best advice.
