Published: 27-10-2026
Legal claims brought against a company can raise significant questions as to their proper accounting and tax treatment. In particular, where the outcome of court proceedings is uncertain, it is essential to determine whether the company should recognise a provision for liabilities, disclose a contingent liability or, where appropriate, make no accounting recognition at all.
The correct classification of these situations is particularly relevant for Corporate Income Tax (hereinafter, “CIT”) purposes, since the accounting recognition of a provision does not guarantee its tax deductibility. It must be verified, on the one hand, that the accounting criteria are met and, on the other, that no limitation laid down in tax legislation applies.
From an accounting standpoint, Recognition and Measurement Standard 15 (NRV 15ª) of the Spanish General Accounting Plan (PGC) requires three conditions for a provision to be recognised: a present obligation arising from past events, the probability that settling it will require an outflow of resources, and the ability to make a reliable estimate of its amount. Accordingly, the filing of a lawsuit is not, in itself, sufficient to record the provision; whether these conditions are met must be assessed on a case-by-case basis.
The existence of a claim is, in fact, the starting point of an analysis in which the specific circumstances of the dispute, the parties’ claims and the likelihood of the various possible outcomes must be assessed. An expert, objective and impartial judgement must therefore be made as to the likelihood that the dispute will ultimately give rise to an obligation for the company.
Measurement of the provision.
Once it has been established that the requirements for recognising the provision are met, it must be measured at the present value of the best possible estimate of the amount required to settle the existing obligation, or to transfer it to a third party, at the year-end.
As a general rule, the best estimate will correspond to the most likely outcome, although the various possible scenarios must also be considered. Where a single best estimate cannot be determined, the possible amounts of the expected future expenses must be assessed and, at least, the minimum expected amount must be recognised.
If, on the contrary, not even a minimum amount could be reliably estimated, no provision should be recognised; instead, the obligation would constitute a contingent liability.
This measurement therefore requires an individual analysis of each set of court proceedings, especially where the amount claimed is significant or where there are factors that may substantially affect the parties’ prospects of success.
A particular case: the purchase of loan portfolios.
The issue is of particular interest in the case analysed by the Spanish Directorate-General for Taxation (DGT) in Binding Ruling V0229-26.
The requesting entity is engaged in acquiring portfolios of doubtful receivables, which it purchases at prices well below their nominal value. One of the receivables acquired, arising from insolvency proceedings, was ultimately paid in full at its nominal value, generating a capital gain for the entity.
Before the receivable was settled, the entity had held negotiations with a third party for its possible sale or assignment. However, while the entity considered that those negotiations had not resulted in a binding agreement, the third party took the view that the assignment had indeed taken place.
In light of this disagreement, the third party filed a civil lawsuit, claiming from the entity the difference between the alleged assignment price of the receivable and the amount ultimately received by the entity as a result of the insolvency proceedings.
Given the uncertainty surrounding the outcome of the litigation, the entity recorded a provision for the amount claimed and asked the tax authorities whether the corresponding expense could be deductible for tax purposes.
The DGT’s position.
The DGT starts from a fundamental premise: in the absence of specific CIT rules on the recognition of this type of provision, accounting rules must be applied.
Consequently, the entity must determine, in light of the specific circumstances of the dispute, whether a present obligation exists and whether the court proceedings are likely to result in an outflow of resources. The mere filing of the lawsuit is not, in itself, sufficient to evidence the existence of such an obligation.
In the case analysed, a well-founded assessment of the prospects of success of each party’s position will be required. If the analysis indicates that the proceedings are likely to end with a ruling in the entity’s favour, the claim will be treated as a contingent liability.
Conversely, if the court is likely to find the entity liable, a provision for other liabilities must be recognised in accordance with the criteria laid down in NRV 15ª of the PGC.
Is the provision tax deductible?
Once the provision has been found appropriate from an accounting standpoint, its CIT treatment must be analysed.
Article 14 of the Spanish Corporate Income Tax Law sets out certain cases in which expenses relating to provisions and contingencies are not tax deductible. However, a provision properly recorded to cover liabilities arising from court proceedings is not, as a general rule, among those cases.
Therefore, where the provision qualifies for accounting purposes as a provision for other liabilities, the corresponding expense may be tax deductible, provided that the general requirements of tax legislation are met.
In particular, the requirements regarding its recording in the accounts, its allocation to the correct period under the accrual principle (whereby the expense is attributed to the period in which it arises, regardless of when it is actually paid) and its proper supporting documentation must be met, and no other specific rule limiting its deductibility may apply.
The DGT’s conclusion is clear: the existence of a legal claim does not, in itself, render the expense non-deductible. The key issue will be to verify, beforehand, that the provision has been properly recognised in accordance with accounting rules and that no specific tax limitation applies.
A matter requiring case-by-case analysis.
The administrative criterion highlights the importance of properly assessing litigation contingencies before recording them in the accounts and determining their tax treatment. It is necessary to analyse, among other aspects, the nature of the disputed obligation, the contractual background, the legal position of the parties, the available evidence and the likelihood of the various possible outcomes of the litigation.
From a tax perspective, correct classification is equally relevant, as it will determine, first, whether the expense can be recognised and, subsequently, whether it may be deductible for CIT purposes.
Binding Ruling V0229-26 of 5 February 2026 thus provides a criterion of interest for entities facing legal claims with an uncertain outcome, particularly where these may give rise to financial obligations of a significant amount.
If you need advice on the accounting and tax treatment of a legal claim, Gentile Law has a team of experts ready to analyse your case and provide you with the advice you need.
Contact:
Ana García Ginés
Senior Associate en Gentile Law
anagarcia@gentile.law
+34 604 51 21 60
Amy Valarezo Toala
Paralegal en Gentile Law