Normally, when an individual or company requests a loan from a relative or a mortgage from a financial institution, it is not repaid on time or at least until it is claimed. The Superior Court of Justice of Madrid has recently ruled in a ruling that a debt in Spain cannot be considered forgiven just for the mere fact that it is not reclaimed after its expiration date. If the loan is written off, the debtor will have to pay the Spanish Inheritance and Donations Tax (Impuesto de Sucesiones y Donaciones or ISyD).
With this ruling, the Madrid Supreme Court opposes the interpretation of the Spanish tax authorities, the Hacienda, which considers that if the lender doesn’t make moves to recover the loan, they are effectively cancelling it. In fact, the Court considers that reaching "the deadline of an unpaid debt simply implies the start of action to claim it", comments José María Salcedo, a partner at the law firm Ático Jurídico.
So, when can the loan be written off due to a lack of anyone claiming it? The only criterion given by the Madrid Supreme Court is that the repayment of the loan will only be cancelled once the civil limitation period, which is five years, has elapsed. But, as Salcedo reminds us, the Court itself acknowledges that this interpretation leads to multiple problems due to the long statute of limitations of civil actions which can be interrupted and resumed for different reasons, such as partial payment or recognition, which would have to be added to the already long initial term of the loan.
"However, any other interpretation, apart from having no legal support, would lead to indeterminacy and legal uncertainty because it cannot be considered that the lender has waived their right to demand the debt for the course of a "prudential term", such as two or three years, without having exercised any action," says the lawyer.
In short, the writing off of the loan would only be understood to have taken place when the lender's right to claim repayment of the loan from the borrower has expired. In this case the loan will be considered a donation and the debtor will have to pay the ISyD. If they do not, the tax authorities have four years to check and settle this tax.
The granting of a loan is exempt from the Property Transfer Tax (Impuesto de Transmissiones Patrimoniales or ITP), but in the case of cancellation of the loan by the lender, it must be taxed according to the ISyD. "And in most cases, unless there is a relationship (parents to children), the donation cannot benefit from tax benefits," Salcedo says.
In summary, loans between individuals are cheaper than going to a financial banking institution but the tax cost can be high if the debtor ends up paying the gift tax on it.