Self-employed workers will be able to deduct meals with clients.

Self-employed workers can now deduct the cost of business meals with their clients. The Supreme Court has established case law with judgment 458/2021, on one of the most controversial expenses for self-employed workers to deduct

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The court thus took a position against the view of the tax authorities, which, as a general rule, reject any deduction that is not directly related to the business and require strict substantiation of the expense. However, following the Supreme Court’s ruling, self-employed workers are now entitled to deduct any expense arising from lunches, dinners, or even gifts to clients or suppliers, without that courtesy having to result in substantiated income for the business.

The tax authorities take advantage of the confusion and breadth of the rule.

Expenses on business meals or gifts to clients are classified in the tax legislation under the concept of ‘donations and gratuities’ (donaciones y liberalidades). They are defined as ‘giving something in exchange for nothing’, that is, “incurring an expense that does not bring you any income,” the lawyer explained. However, “this concept was not well defined, and the tax authorities took advantage of that to reject any expense of this kind that self-employed workers tried to deduct in their tax return.”

But now the courts have “limited the actions of the Spanish Tax Agency (AEAT), and are essentially saying that, from now on, indirectly related expenses that are regarded as gratuities or donations can indeed be deducted.”

How the judgment affects the tax authorities’ position

The Supreme Court judgment runs counter to the administrative doctrine under which the tax authorities had been treating these expenses as non-deductible, on the grounds that they were not directly related to the activity carried out by the self-employed worker.

But the Supreme Court has changed how these expenses are viewed, stating that “their purpose is to achieve a better business result.” The Court holds that “deductible, therefore, are those expenses which, while being donations or gratuities, are colloquially known as courtesies extended to clients or to the company’s own staff.”

How are business meal expenses now substantiated?

This judgment breaks with the tax authorities’ requirement to provide evidence of income in order to accept that the meeting was work-related. From now on, to prove that the meeting took place, it will be sufficient to have

– An email informing the client that you are going to send them a small gift or invite them to lunch/dinner

– A text message or WhatsApp message

– A phone call

– The client’s name appearing on the business’s list of regular clients

Purpose: building client loyalty and incentivizing clients

In the judgment, the Supreme Court states that “although business meals, gifts to clients, or promotional expenses do not seek the direct and immediate achievement of better results, by their very nature and characteristics they pursue an indirect, future result.”

This is therefore a highly significant change for self-employed workers’ deductions, since from now on they will be able to deduct meals with clients in Corporate Income Tax (IS), regardless of whether or not any agreement or collaboration contract is reached at those meals.