Treasury clarifies tax doubts that affect lawyers

The General Directorate of Taxation explains, in a series of binding consultations, the issues relating to the taxation of the professional services of lawyers and their implications for VAT or personal income tax.

Lawyers have raised a number of issues with the VAT Directorate General of Taxes.
The General Directorate of Taxation (DGT) has recently responded to a series of questions related to legal practice. They clarify issues such as the type of services that should include VAT or the withholding tax that should be applied to lawyers' income tax.

– VAT of a lawyer in The Hague
The services of a legal advisor of the Hague Tribunal (UN) are subject to VAT, even if they are provided within the framework of diplomatic or consular regimes or international organizations. As the DGT points out in a consultation, to the extent that the recipient of the advisory services (court) does not act as a businessman or professional and the lawyer is established in the territory of application, the operations will be subject to VAT.
Article 22 of the VAT Law establishes that deliveries of goods and services carried out within the framework of diplomatic and consular relations, as well as to international organizations recognized by Spain or to the staff of said entities, are exempt from payment. of the tax. However, Tributos points out that the regulatory evolution of the aforementioned law does not include legal advice in these exempt services.

– Deduction of attorney fees
The travel expenses to see clients and to file a claim before the courts and administrative bodies that a lawyer includes in his fees form part of the VAT tax base, which the lawyer must pass on to his client. This is how the General Directorate of Taxation sees it, in a consultation in which it specifies that it is not the same if the sums are paid in the name and on behalf of the client - those provided -, which are not invoiced with VAT.

Therefore, if legal advisors can justify that the kilometer costs incurred are considered supplies, they will not form part of the tax base. For these costs to be considered substitutes, they must meet certain requirements. Of these, the amounts must be paid in the name and on behalf of the client, which must be proven by the corresponding invoice issued in the name of the client, and the payment must be made by express order, verbal or written, of the client himself in whose name he acts.

– VAT on legal costs
The payment of legal fees in a dispute may not include VAT if the legal advice has been provided by lawyers who are part of the staff of the winning company. Consequently, the General Directorate of Taxation responds to a request from a company with several lawyers registered in its personnel record to know if, in the event that the result is positive, it is obliged to indicate in the VAT declaration the payment of the costs imposed on the party that has lost the process. According to the DGT, what determines that a service provided by a natural person is subject to taxation is that it is provided on their own account and not when the services are provided by natural persons with an employment relationship.

– Payment of a fine imposed on a client
In another consultation, the General Directorate of Taxation is analyzing the conditions necessary for a tax advisor to deduct from corporate tax the payment of a tax penalty imposed due to the fault of one of his clients. As explained above, costs related to contractual penalties, that is, costs arising from the company's failure to comply with its obligations under contracts concluded with third parties, are considered deductible.
However, in order to deduct these costs, the DGT requires proof that they have occurred in the execution of the activity, for which contractual liability is necessary. According to the tax authorities, this is not the specific case examined during the consultation, since the payment of the fine imposed on the client is made after a simple legal opinion without any contract in which the tax advisor assumes this responsibility. Therefore, it concludes that the payment on that occasion will not be considered deductible for corporate tax purposes.

– Reduction of income tax on representation in court
According to a binding consultation with the General Directorate of Taxation, companies subject to the law can only apply the 15% reduction of personal income tax on withholding on account for legal advisors if an audit report has been submitted prosecutor to the Commission.