BackA recurring question in the field of taxation is whether arrears are subject to withholding tax, and if so, what rate should apply. This issue is particularly relevant given that the withholding tax system establishes a general rule for rents subject to this tax, as set out in Article 99 of the Spanish Personal Income Tax Act (LIRPF).
Throughout the legislation and its implementing regulations, the situations in which withholding should apply, how to calculate the applicable rate, and whether a fixed or variable rate should be applied depending on the situation, are further detailed.
When should withholdings on arrears be applied?
Withholding on arrears is one of the most debated issues. The primary question is whether these arrears are subject to withholding tax, and whether the rate should be calculated based on the year in which the arrears were accrued, the rate applicable at the time of payment, or another rate altogether.
In accordance with Article 99.2 of the LIRPF, entities and legal persons that pay out income subject to Personal Income Tax (IRPF) are obliged to apply withholding and make a payment on account for the corresponding taxpayer’s tax. This obligation also applies to taxpayers engaged in economic activities and to non-resident individuals or entities operating in Spain.
Regarding the withholding rate applicable to arrears, Article 80.1.5º of the IRPF Regulations stipulates that the withholding tax rate will be 15% for arrears attributable to previous fiscal years, unless other rates are applicable under the provisions of other sections of the same regulation.
Therefore, withholding on arrears should be applied at a general rate of 15% when the arrears correspond to income from previous years.
Confirmation from the General Directorate of Taxes
This interpretation was confirmed by the General Directorate of Taxes in its Binding Consultation (V3027-21) of 3 December 2021. The consultation clarified that, as the obligation to withhold arises when the income is paid, and since the arrears correspond to previous fiscal years, the applicable withholding rate is 15%, in accordance with Article 80.1.5º of the IRPF Regulations.
Exceptions
However, not all arrears are to be attributed to a previous fiscal year. According to Article 14 of the LIRPF, when the right to receive arrears arises from a judicial decision, such arrears must be attributed to the period in which the decision became final. In these cases, the fixed 15% rate applicable to arrears from previous years does not apply, and instead, the withholding must be calculated based on the general rate applicable, depending on the taxpayer’s personal and economic circumstances.
The General Directorate of Taxes also addressed this in its Binding Consultation (V3161-21) of 21 December 2021, which examined the case of an employee who received arrears corresponding to a prior period. In this case, the withholding tax should not be applied based on the fixed rate, but rather on the applicable rate at the time of payment. Furthermore, it was noted that if the arrears were not paid at the appropriate time and withholding had been applied prior to their payment, such withholdings could be considered undue payments.
Additional Considerations
It is important to note that when arrears are received following a judicial resolution, they must be attributed to the period in which the resolution became final and declared in the corresponding fiscal period. This implies that taxpayers must submit a supplementary self-assessment to regularize their tax position for the affected year, without incurring penalties or interest as long as the process is completed within the established deadlines.
Thus, in cases where the company has applied withholding on unpaid salaries, such withholding would be deemed undue, as the obligation to withhold arises only when the payment is made, not beforehand.
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