B Law & Tax
28 July 2023

Tax advisor: The economic-administrative courts order reimbursements of the Personal Income Tax for contributions to former mutual insurance companies

The economic-administrative courts now recognize the right of retirees who previously made contributions to the former mutual insurance companies. These retirees can deduct 25% of those contributions from the Personal Income Tax base and also claim reimbursement of the overpayments from the Treasury in their income tax returns for the last four years, periods that have not yet prescribed. This decision is based on the doctrine established by the Supreme Court on February 28, which allows the deduction to avoid double taxation in the event that the contributions to mutual funds were not deducted at the time.

The first economic-administrative court to change its criterion has been that of Cantabria. In a ruling issued on June 30, which is not binding, it has ruled in favor of the taxpayer in requesting that the Treasury reimburse the part that was not deducted in the 2020 return referring to contributions to occupational mutual insurance companies. Furthermore, in the same ruling, it is indicated that in order to determine the amount on which the 25% exemption applies, it is valid, in the absence of better data, to perform a time calculation that relates the periods of the contributions to the total time contributed as recorded in the working life.

Three periods

The court establishes that in order to calculate the exemptions it is necessary to distinguish between three periods. First, contributions made to mutual insurance companies before December 31, 1966 are completely exempt from taxation, i.e., they do not have to pay taxes. Secondly, contributions made between January 1, 1967 and January 31, 1978 are taxed at a 25% reduction, which means that only 75% of such contributions are taxed. Finally, it is specified that contributions made to the mutual insurance company after January 1979 are taxed without any reduction, which means that these contributions must be subject to full taxation without any reduction.

Origin of the conflict

This occurs because the former mutual insurance companies to which employees contributed in order to receive their retirement pensions became Social Security managing entities from January 1, 1967 until December 1978. During this period, employees could still make contributions to these entities. However, as of January 1, 1979, these mutual insurance companies were extinguished and incorporated into the Social Security National Institute (INSS). During the time they were managing entities, many employees could not subtract these contributions in their personal income tax returns, although the courts considered them as normal Social Security contributions.

However, the Supreme Court recognized the right to a 25% personal income tax exemption for this part of the contributions made between 1967 and 1978, based on the Second Transitory Provision of the Personal Income Tax Law. This Provision establishes that “if the amount of the contributions that could not be reduced or reduced in the taxable base cannot be demonstrated, 75% of the retirement or disability benefits received will be included”.

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