The tax deductibility of representation and customer service expenses has been a topic of debate in the VAT field. Although entrepreneurs can prove their relationship to business, the current VAT Law provides limitations on the deduction of certain expenses, such as food, beverages, or recreational shows, with the aim of restricting the deduction in cases of final consumption and maintaining the tax neutrality.
The limitation of VAT deductibility in customer service generates debate. Certain expenses are excluded without considering their particularities, although they are crucial for many companies in attracting and retaining customers. Unlike VAT, Corporate Tax allows the deduction of these expenses by recognising its close relationship with business activity and income generation.
At national level, the case law on the VAT deduction is controversial. While the National High Court has tended to allow this deduction when the expense is deductible for Corporate Income Tax, other bodies such as the General Directorate of Taxes and the Central Administrative Economic Court have taken a contrary approach, endorsing the restriction. The Supreme Court has supported the restriction on the deduction of VAT on expenses related to customer services, as being in line with European law.
At a European level, the VAT Directive does not directly address the restriction of VAT on customer service but allows Member States to maintain restrictions prior to their accession to the European Union through the “standstill clause”. In the case of Spain, the regulations limiting the VAT deduction came into force in 1986, coinciding with its accession to the European Union.
Recently, in an order of 8 February 2023, the Supreme Court considered it relevant to question “whether a national regulation introduces restrictions on the right to deduct VAT with simultaneous effect, i.e., on the same date as its accession to the European Union, would be invalidated by the application of the Standstill clause”.
The Court of Justice of the European Union ruled on a similar case, in its judgement of 18 July 2013 (Case C-124/12 AES-3C Maritza East) confirming that the right to deduct VAT, if it enters into force at the same time as the Member State’s accession to the European Union, it would not be protected by the standstill clause.
Ultimately, the Supreme Court will analyse whether the restrictions on VAT for certain expenses, such as customer service, comply with European regulations. This could have a major impact on taxpayers, who expect clarification on the relationship of these expenses to their business activity.
