Application of the reduction in personal income tax on pension plans received in different years
The Central Economic Administrative Court (TEAC) has modified the criterion of the Tax Agency which only allowed the 40% reduction to be applied to benefits in the form of capital received in a single financial year. The amounts received by the beneficiaries of pension plans and other social welfare plans are considered as income from work and form part of the general taxable base for personal income tax.
The regulations establish a 40% reduction for these benefits received in the form of capital (lump sum) from contributions made prior to 1 January 2007. In other words, only 60% of such amounts are included in the general tax base, which is taxed, where applicable, according to the general tax scale. The Tax Administration, making a restrictive interpretation of the regulations, only accepted the application of the reduction in a single tax year.
This implied that the taxpayer, in order to benefit from the reduction in all his pension plans, had to receive all the single payments in the form of capital in the same financial year, with the detriment that this entailed due to the progressive nature of the tax. The ruling issued by the TEAC on 24 October establishes that the reduction is applicable independently for each pension plan, so that it is not necessary for the capital benefits of each of them to be received in the same financial year in order to benefit from it.
The criterion of the TEAC, as a result of an extraordinary appeal for the unification of criteria, binds the tax administration, which should apply it ex officio. This ruling opens the door to reclaiming taxes paid in excess in non-prescribed years as a result of having maintained the criterion of the Tax Administration and having applied the reduction in only one year.
With the new criterion established by the TEAC, the formula adopted to redeem pension plans becomes even more important, as a higher tax saving can be obtained.
For this reason, it is advisable to plan the most favourable option for the redemption of pension plans, as well as to claim back any taxes paid in excess due to not having applied the 40% reduction.