On Thursday, May 7, through Legislative Decree No. 568, the Legislative Assembly approved a new authentic interpretation of Article 28 of the Income Tax Law, as well as the repeal of Legislative Decree No. 345, dated May 29, 2019, which contained a previous authentic interpretation. This, as outlined in the preamble to the decree, is intended to clarify interpretive criteria regarding the requirements that must be met for the deductibility of those losses, expenses, or costs incurred in the generation of income and in the maintenance of the source of income.
In this regard, the new authentic interpretation introduces a novel element: for the deduction to be allowed, the expenditure—in addition to being inherent to the taxpayer’s economic activity—must be measurable, recognizable, and constitute a real cost, requirements already covered in the previous interpretation, and must also meet a reasonableness criterion, which implies that its amount and nature must be proportionate to the activity carried out and the income generated by the taxpayer, which could require a case-by-case analysis by the Tax Administration.
On the other hand, the new official interpretation eliminates a requirement that, in practice, has represented an obstacle to the deductibility of the cost or expense. The previous interpretation required that such items be accredited and recognized by relevant agencies or competent regulatory bodies, which posed a limitation for those taxpayers who, due to the nature of their economic activity, did not have access to such institutions. In contrast, the new interpretation adopts criteria aligned with those applicable to other expenditures of this nature, establishing that, in addition to being properly documented, such items must be recorded in the taxpayer’s accounting records or special records, as applicable.
Finally, more flexible wording is incorporated. While the previous interpretation established that, under no circumstances, would the deduction of these costs or expenses be allowed if, at the time of determining taxable income, no tax was due, the new interpretation establishes that the admissibility of the deduction will not be conditional upon the existence of a tax calculated at the time of determining taxable income.
Likewise, the General Directorate of Internal Revenue is authorized to issue instructions, circulars, resolutions, guidelines, and other administrative actions it deems necessary for the application of the authentic interpretation.
Furthermore, the previous authentic interpretation contained in Legislative Decree No. 345, dated May 29, 2019, published in the Official Gazette No. 99, Volume 423, dated May 31, 2019, was rendered null and void and, consequently, repealed.
The amendment will take effect 8 days after its publication in the Official Gazette; therefore, we will monitor the exact publication date for its immediate implementation.
The new interpretation could represent a significant relaxation of the deductibility criteria applicable to certain expenses related to income generation and the maintenance of the source of income, although its specific application will depend on the administrative guidelines that the Tax Administration may eventually issue.
For any additional inquiries, please contact Diego Martín (dmartin@consortiumlegal.com), María Reyes (mereyes@consortiumlegal.com), or via email (taxelsalvador@consortiumlegal.com).