Interest on late payment is not taxable for personal income tax purposes
A recent Supreme Court ruling has ruled that there can be no personal income tax liability for late payment interest paid by the tax authorities to a taxpayer.
Indeed, the recent ruling of 3 December (appeal 1651/2020) of the Supreme Court has considered that the late payment interest received by a taxpayer as a result of the refund of undue income by the Tax Agency is not subject to personal income taxation of the said taxpayer.
As you know, late payment interest can arise either when the taxpayer requests the refund of an excess of a tax paid or as a result of the settlement of a procedure that results in an amount to be refunded. In these cases, until now, the Treasury’s criterion regarding this interest on late payment was that it represents taxable income and, therefore, in the case of individual taxpayers, it must be included in the personal income tax savings base and therefore be taxed at a rate of 19% to 23% depending on the amount (which for 2021 will be between 19% and 26%).
This criterion represents a clear inequality vis-à-vis the taxpayer, given that, while if the taxpayer has to pay interest on late payments to the Treasury these are not tax deductible; on the other hand, when it is the taxpayer who receives this interest on late payments, it is a capital gain.
This important Supreme Court ruling resolves this hitherto existing inequality, given that the High Court establishes that late payment interest received by an individual should not be considered as a capital gain and, therefore, is not subject to personal income tax.
The argument put forward by the Supreme Court to conclude that we are dealing with a non-taxable capital alteration is because “it is clear that, when the taxpayer is reimbursed for interest unduly paid, compensating for it, there is no such capital gain, but rather a rebalancing is produced, cancelling the loss previously suffered”. And it adds that late payment interest therefore has a compensatory purpose. If they were to be considered subject to personal income tax, this purpose would be frustrated, at least partially, as the compensation would be reduced by the amount of tax payable, so that the loss suffered would not have been fully repaired.
This ruling opens the door to filing a claim with the tax authorities for undue income for late payment interest received by the taxpayer that would have been subject to personal income tax as a capital gain within the savings base. Provided that no more than four years (limitation period) have elapsed since the date on which the deadline for filing your personal income tax return expired. Therefore, as of today, you will be able to request a refund of the overpaid amount in your 2016 and subsequent years’ returns.
If you find yourself in any of these situations, do not hesitate to contact us to help you file the corresponding application for undue income with the Tax Authorities.
