How are late payment interest taxed?
In this article we are going to see how late payment interest is taxed in corporate tax.
Nobody likes to pay interest, nobody, but in life practically everyone has to pay interest.
If we have a company and it has to pay interest for whatever reason, we at least want to deduct that expense, make a small profit or rather pay less tax, accounting for that expense in corporate tax.
Until now, the courts did not allow the expense of late payment interest to be deducted. But now they do.
What is tax late payment interest?
Late payment interest is compensation
The purpose of late payment interest is to compensate the Treasury for the financial cost of a taxpayer making a tax payment outside the statutory deadline,
As well as to compensate taxpayers for the financial costs arising from having made an undue payment or from obtaining a tax refund in their favour late.
This is colloquially known as tax refund interest.
Late payment interest in favour of the Treasury
The main cases in which late payment interest accrues in favour of the Treasury are the following:
- When the Treasury regularises the taxpayer’s situation in a verification or inspection procedure, claiming an unpaid debt or a refund obtained unduly.
- When filing late declarations outside the deadline, when there is a delay of more than 12 months.
- Or when the suspension or deferment of payment of a tax debt is requested.
Late payment interest in favour of the taxpayer
Yes, yes, you read that right, we mortals also have the right to collect late payment interest.
On the other hand, the main cases in which interest accrues in favour of taxpayers are:
- When an erroneous payment has been made and a refund is requested. In these situations, late payment interest is generated from the moment the erroneous payment has been made until the day on which the payment of the refund is authorised.
- When the refund generated by the regulations of a tax is received (for example, a VAT or IRPF refund as a result of the liquidation process of these taxes).
In this last case, late payment interest accrues if the Treasury does not make the refund within a maximum period of six months.
Interest accrues from the date on which this maximum period expires.
If the Treasury returns the money before then, no interest accrues.
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How is late payment interest calculated?
Calculation of late payment interest
The amount of interest to be paid (whether the payer is the Treasury or the taxpayer) is calculated by applying the late payment interest rate provided for in the General State Budget Law (PGE) for each year.
If the calculation covers more than one year, the rate in force in each annual period is applied (i.e. the interest accrued each year must be calculated according to the interest rate for each year).
You can calculate late payment interest with this Treasury late payment interest calculator
2025 Late Payment Interest Rate
Currently, since the last approved PGE were those of 2023, the interest rate set for that year is applicable: 4.0625% per year.
Year
Late Payment Interest
2016
5%
2017
4.375%
From 2018 to 2022
3.75%
From 2023 to 2025
4.0625%
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Deductibility as an expense
It is now necessary to examine how interest on late payments is taxed in relation to corporation tax.
With regard to the interest that companies – corporate income tax (CIT) payers – pay to the Treasury, the Central Economic and Administrative Court (TEAC) opposed its deductibility in certain resolutions adopted in 2015 and 2017.
The argument on which it based its criterion was that the IS regulations denied the deductibility of actions contrary to the law: given that late payment interest is often generated as a result of regularisations by the Treasury, for TEAC, in such cases, it should be considered non-deductible.
It is deductible
Thank God, the Supreme Court has resolved this problem and confirmed the deductibility of tax default interest on the basis of the following arguments in a ruling dated 24-07-2023 :
- Such interest is not of a penalising nature, but exclusively compensates for the loss caused to the Treasury by the delay in paying the tax debt.
- Consequently, if the legal conditions for deductibility of an expense – justification, accounting and correlation with income – are met, deductibility cannot be questioned.
- However, as these are financial expenses, they will be subject to the limitation established by corporation tax regulations for this type of expenditure.
As a reminder, the net financial expenses that a company may deduct each year for corporation tax (IS) purposes are limited to the higher of the following two amounts:
- 30% of operating profit for the year;
- or €1 million.
Late payment interest paid by IS taxpayers is a deductible expense. On the other hand, interest received by personal income taxpayers is a capital gain and must be declared within the general personal income tax base.
