BackIn two recent rulings, the Central Economic-Administrative Court (TEAC) has protected taxpayers who could face a tax regularization due to a recent Supreme Court ruling on the taxation of late payment interest. Specifically, this agency, which is part of the Ministry of Finance and Public Function, has determined that the tax authority cannot take advantage of the sudden change in the Supreme Court to require taxpayers to pay taxes on old compensation received from the Tax Agency.
Last January, the Supreme Court issued a decision of great importance, surprise and controversy, where it established that taxpayers will be subject to tax on late payment interest paid to them by the Administration after making a mistake. This decision of the high court invalidated the criterion that the same Supreme Court had established almost two years before, in December 2020, when it determined that these compensations were exempt and should not be included in the taxable base of the personal income tax (IRPF).
According to legal sources, the Supreme Court’s change of criteria now requires that all compensation received by taxpayers be included in personal income tax (IRPF). Although this decision has generated controversy, there seems to be no debate on this point. However, they point out that the new criterion could also lead to possible regularizations in the future for late payment interest that, according to the December 2020 ruling, were not included in previous tax returns.
Due to these facts, according to the Economic-Administrative Court itself, “the existence of two successive and opposing criteria of the Supreme Court on the same question of cassation interest raises a problem directly related to the principle of protection of legitimate expectations, a principle established by case law whose effectiveness depends on the specific circumstances of each case”. In this sense, the TEAC goes on to explain that if a taxpayer, as a result of the Supreme Court ruling of December 3, 2020, filed its Personal Income Tax return without including the late payment interest paid by the Tax Administration, it would not currently be subject to pay tax on such interest.
In its statement, the Economic-Administrative Court (TEAC), which reports to the Ministry of Finance, takes the opportunity to reiterate the new criterion established by the Supreme Court, recalling that late payment interest paid by the state, autonomous or local tax administration as a result of a refund of undue income is subject to and not exempt from Personal Income Tax, and must be taxed as a capital gain that is integrated into the general income. In December 2020, the Supreme Court completely exempted late payment interest from any tax. Prior to that, the Treasury required these compensations to be taxed as capital gains, including them in the savings tax base, with tax rates ranging from 19% (for compensations up to 6,000 euros) to 28% (from 300,000 euros). However, in January 2023, the Supreme Court radically changed its position and established that these indemnities are subject to taxation and must be included in the general income, with regional tax rates up to a maximum of 54%. The TEAC recognizes that the distinction between the different components of income is not accidental and has been carefully considered by the legislator, since specific rules and differentiated tax rates are established for each of them.
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