How To MinimIize The Impact Of Late Payments In Spain

Mercedes ClavellOf Counsel, Arco Abogados

In Spain,
companies and public administrations have never been quick payers, not even in
those times before the crisis. Many voices, especially from medium and small
companies associations, have claimed for better legal solutions. However, it
was not until 2004 when the first act aimed to reduce the damages caused by late
payment was approved.

This law
has been amended two times since then, and in summary, it provides that
invoices should be paid within a maximum term of 30 or 60 days, and allows the
creditor to claim for an interest of Euribor plus 8 points, plus the reasonable
costs incurred in the recovery.

The parties
could agree a higher interest in the correspondent agreements. If the parties
have not entered into any formal agreement, the creditor could remind the
debtor that he is obliged to pay this interest when the first reminder to pay
the invoice is issued (and sometimes this is effective!). Lawyers always
mention this matter in the letters that we usually send to the debtors before
starting the lawsuits.

As court
cases use to last a minimum of 14-18 months before the first judgment is
issued, the 8% + Euribor interest rate 
–provided the debtor is not insolvent- usually implies a satisfactory
financial compensation for the creditor.

A second
measure to mitigate the damages caused by late payment is included in the tax
laws. They allow companies who have unpaid invoices to deduct the VAT included
in such invoices in the following circumstances:

  • The
    invoice should have been unpaid for 1 year, or for 6 months if the company is
    considered a small or medium one (last year’s turnover below € 6 milion). 
  •  A
    payment request through a public notary should have been sent to the debtor or
    a court claim should have been filed. 
  • The
    creditor company should notify the debtor that it will deduct the VAT. 
  • The
    creditor company should notify the tax authorities the “amendment of the
    taxable base” of the correspondent invoices. This amendment should be executed
    within the term between 1 year after the invoice was due (or 6 months is the
    company is a small or medium one) and a maximum of 3 months.


The deduction is executed through setting off
the VAT included in the unpaid invoices from the VAT to be paid by the company.
Considering the delay and difficulties of litigation, many times, recovering
the VAT (at 21% ordinary rate now) is the only or fastest way to obtain a
compensation for unpaid invoices. An additional advantage is that if the
collection of the credit is achieved through the court procedure and not
through an agreement with the debtor, the tax authorities do not request to pay
the VAT.

If it is foreseen that the debtor company is or
could be insolvent, or the term (1 year or 6 months + 3 months) to apply for
the VAT deduction has elapsed, a possible 
remedy is to apply for the debtor’s bankruptcy. We will analyze  this option, and some other litigation o debt
recovery tips in a later article for IR newsletter.