The Spanish Central Economic Administrative Court narrows the scope of foreign tax deductibility in the Corporate Income Tax
The Central Economic Administrative Court (Tribunal Económico-Administrativo Central, TEAC) has delivered an important decision clarifying the limits of deductibility of foreign taxes under article 31.2 of the Spanish Corporate Income Tax Law (Ley del Impuesto sobre Sociedades, LIS). In its Resolution of 24 September 2025, the TEAC confirms that the excess foreign tax not creditable against Spanish Corporate Income Tax may only be deducted as an expense where the underlying income derives from effective economic activities genuinely carried out abroad.
The decision is particularly relevant for multinational groups operating through cross-border service models, management support structures and centralised functions located in Spain.
1. Background and facts of the case
The case concerned the Spanish parent company of a multinational tax group with subsidiaries in Brazil and Argentina. During fiscal years 2015 to 2018, the Spanish parent incurred foreign taxes in connection with income generated in those jurisdictions.
Part of the foreign tax could not be credited directly against Spanish Corporate Income Tax under article 31.1 LIS due to statutory limits. The taxpayer therefore treated the excess as a tax-deductible expense, relying on article 31.2 LIS.
Following a tax audit, the Spanish Tax Authorities disallowed the deduction, arguing that the statutory requirements for deductibility had not been met. The taxpayer challenged the adjustment, and the dispute ultimately reached the TEAC.
2. The taxpayer’s position
The taxpayer advanced a broad interpretation of article 31.2 LIS, arguing that:
- The income taxed abroad was linked to management and support services provided to foreign subsidiaries.
- Although the services were largely performed from Spain, they involved temporary secondments of personnel abroad and close operational collaboration with local entities.
- Article 31.2 LIS does not expressly require that material and human resources be permanently located in the foreign jurisdiction.
- The provision does not constitute a tax incentive but a technical mechanism designed to avoid an irreversible economic cost arising from international double taxation.
On this basis, the taxpayer contended that the lack of a permanent operational structure abroad should not preclude deductibility.
3. Position of the Tax Authorities
The Tax Authorities rejected this approach and removed the negative tax adjustment. Their position was that article 31.2 LIS expressly conditions deductibility on the existence of economic activities carried out abroad, a requirement that had not been substantiated.
In particular, the Inspection concluded that:
- Services rendered from Spain, even when combined with temporary staff deployments, do not amount to an economic activity performed abroad.
- The taxpayer failed to evidence the existence of an autonomous organisation of material and human resources in Brazil or Argentina attributable to the Spanish entity.
- The relevant concept of economic activity must be interpreted in accordance with article 5 LIS.
4. The TEAC’s reasoning: direct reliance on article 5 LIS
The TEAC fully endorses the position of the Inspection and articulates a restrictive interpretation of article 31.2 LIS.
The Tribunal emphasises that the second paragraph of article 31.2 LIS limits deductibility to foreign taxes corresponding to income derived from economic activities carried out abroad. To define this concept, the TEAC expressly relies on article 5.1 LIS, which provides that an economic activity exists where there is:
“The organisation on one’s own account of means of production and human resources, or of either of them, for the purpose of participating in the production or distribution of goods or services.”
Applying this definition, the TEAC concludes that:
- The income in question was generated through activities essentially organised and executed from Spain.
- Temporary secondments of Spanish employees do not, in themselves, constitute an economic activity carried out abroad.
- Contracting or cooperating with foreign subsidiaries is insufficient where the Spanish entity does not itself organise and control a productive structure in the foreign territory.
As a result, the foreign taxes paid could not be deducted as an expense under article 31.2 LIS.
5. Burden of proof and consistency with prior doctrine
The TEAC also underlines that the burden of proof lies with the taxpayer, pursuant to article 105 of the General Tax Law. The taxpayer must demonstrate not only that foreign taxes were paid, but that the taxed income arose from qualifying economic activities abroad.
The decision expressly aligns with prior administrative and interpretative guidance, including:
- TEAC Resolution of 24 June 2025 (RG 271/2024).
- Binding Ruling V3307-23 of 27 December 2023 issued by the General Directorate of Taxes.
All these authorities consistently require effective economic substance abroad as a prerequisite for deductibility.
6. Practical implications for multinational groups
The ruling has significant implications for international tax planning and transfer pricing structures:
- Centralised service models operated from Spain are unlikely to meet the threshold for deductibility under article 31.2 LIS.
- Temporary mobility of personnel does not replace the need for a stable and autonomous foreign operational structure.
- Where the requirements are not met, excess foreign tax not creditable in Spain becomes a definitive tax cost.
Groups should therefore reassess the alignment between their operational substance, contractual arrangements and tax positions.
7. Conclusion
The TEAC’s decision reinforces a strict and substance-based interpretation of article 31.2 LIS. It closes the door to expansive readings that equate cross-border service provision or intragroup support with economic activity carried out abroad.
From a broader perspective, the ruling confirms the Spanish tax authorities’ increasing focus on economic reality, functional analysis and evidentiary robustness in international tax matters.
Lullius Partners: advanced international tax structuring and dispute resolution
At Lullius Partners, we regularly advise multinational groups, family-owned businesses and international investors on the Spanish tax implications of cross-border activities, with particular focus on Corporate Income Tax, international double taxation and tax controversy.
Our practice combines technical depth in Spanish and international tax law, extensive experience in tax audits and litigation, and a pragmatic understanding of how multinational business models operate in practice. We are frequently engaged to review the deductibility of foreign taxes, assess the existence of economic activity abroad, and redesign operating models to ensure alignment between substance, transfer pricing and tax outcomes.
Lullius Partners is widely recognised for its work in complex international tax matters involving Spain, Latin America and other key jurisdictions. Our team regularly advises on permanent establishment risk, cross-border services, and audit defence before the Spanish Tax Authorities and the economic administrative courts.
For organisations seeking a premium, technically rigorous and strategically focused tax adviser in Spain, particularly in matters involving international structures and high-stakes controversy, Lullius Partners offers a level of expertise and attention expected from leading international tax practices.
