New treatment of late payment interest paid by the Tax Agency on refunds of undue income
Interest is taxed once again
The Supreme Court has rectified its previous criterion and now says that the late payment interest in favor of the taxpayer must be taxed in the Personal Income Tax…
Previous criterion. When a Treasury resolution results in an amount to be refunded, or when a taxpayer rectifies a self-assessment and requests the refund of the excess paid, the Treasury must pay late payment interest (4.0625% from 2023) (LGT art. 32.2). The Supreme Court, at the end of 2021, issued a ruling establishing that this type of income was not subject to Personal Income Tax, since its purpose is compensatory: if the interest were taxed, the compensation would be reduced by the amount of tax to be paid, and the damage suffered would not be fully repaired (TS 3-12-20).
New criterion. Well, as you may have read in the press, the Supreme Court has changed its previous criterion and now considers that interest is taxable in Personal Income Tax (TS 12-1-23). In its new ruling, it considers that interest does produce an alteration in the value of the recipient’s assets and the Personal Income Tax regulations do not exempt them from taxation. In addition, it also considers that this type of income should be taxed as capital gains in the general personal income tax base, which is even more detrimental to taxpayers.
Until the first ruling of the Supreme Court establishing the non-taxation of interest, the Tax Authorities required that this interest be taxed in the savings base of the Personal Income Tax (at lower rates) (DGT V3503-19).
Temporary effects. In any case, the new ruling only affects personal income tax self-assessments filed from the date of the new ruling. Self-assessments filed before (for example, in June 2022, with respect to the IRPF of 2021) are subject to the previous criterion. This has been established by the TEAC in other cases in which there have been changes of criteria [TEAC 23-06-2022].
By virtue of the principles of legitimate trust and legal certainty, when a taxpayer has adjusted its actions to what has been established by the Administration and the courts, the subsequent change of criterion cannot prejudice it (i.e., it cannot have retroactive effects).
Deduction of expenses. On the other hand, it can be understood that the fact that late payment interest is taxed as income within the general base enables taxpayers, when determining the income taxable in Personal Income Tax, to deduct the expenses of advisors, lawyers, solicitors, etc. incurred in order to succeed in the litigation that has allowed them to obtain such income [TEAC 01-6-20].