B Law & Tax
31 July 2023

Tax advisor: Tax Authorities allow to deduct the pension plan in the Personal Income Tax for several years

In 2023, the Directorate General of Taxes (DGT) has modified its criteria and now allows to apply a 40% reduction in the IRPF for withdrawals of different pension plans in several years, not limited to the same tax period. This is evidenced by more than 150 binding responses to taxpayer queries issued during this year, following the correction required by the Central Economic-Administrative Court (TEAC) in its ruling of October 24, 2022.

Prior to this ruling, the DGT established that, regardless of the number of pension plans a taxpayer had, the 40% reduction could only be applied to amounts received in the form of capital (i.e., withdrawn at one time and not on a monthly basis as an annuity) “in the same tax period, at the taxpayer’s choice”. The other amounts received in different years, even if they were received as capital, were to be taxed in full without the application of the 40% reduction, as previously established by the DGT.

In its new answers, the DGT indicates that the 40% reduction may be applied to the benefits received in the form of capital for each pension plan, not being limited only to one fiscal year, even when they are derived from several pension plans.

It is relevant to mention that the option to apply a 40% reduction in the IRPF taxable base for pension plan withdrawals made at one time was eliminated with the IRPF Law 35/2006. This law equalized the tax treatment of withdrawals in the form of capital and in the form of income, determining that in both cases 100% of the amounts received would be taxed. However, the same law established a twelfth transitory provision that maintained the 40% reduction for contributions made up to 2006.

In the event that a taxpayer retires or takes early retirement due to a situation of unemployment, Taxes establishes that the term to apply the 40% reduction for contributions made before 2007 is extended to the fiscal year in which the contingency occurs (i.e., when retirement is accessed) or to the following two fiscal years. This provision is found in paragraph 4 of the twelfth transitory provision of the Personal Income Tax Law, which was added by Law 26/2014, of November 27, which amended the regulations.

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