In recent years, there has been significant debate regarding the tax treatment of late payment interest in the context of taxation. Below, we explain how these interests are calculated and how they are taxed under the Spanish Personal Income Tax (IRPF).
What are late payment interests?
Late payment interests are intended to compensate the tax authorities for the financial cost incurred when a taxpayer makes a tax payment after the official deadline. They also compensate taxpayers for financial costs arising from making an undue payment or receiving a tax refund later than expected.
Interests in favour of the taxpayer
The main cases where taxpayers receive late payment interest are as follows:
- When an undue tax payment has been made and a refund is obtained.
Note: In such cases, late payment interest accrues from the date the undue payment was made until the refund payment is ordered. - When a refund arises from tax regulations (for example, VAT or IRPF refunds due to tax settlement procedures).
Note: Interest is due if the tax authorities do not issue the refund within six months. Interest accrues from the day after this six-month period ends. However, if the refund is made earlier, no interest is accrued.
How is the amount calculated?
Late payment interest is calculated by applying the late payment interest rate set in the annual General State Budget Law (Ley de Presupuestos Generales del Estado, PGE) for each year. For example, the latest applicable rate is that of 2024, which is 4.0625%.
Note: If the calculation period spans more than one year, the rate applicable for each specific year is applied separately.
Taxation under personal income tax (IRPF)
A few years ago, the Supreme Court ruled in favour of taxpayers, considering that these compensatory interests were not subject to personal income taxation. However, a later judgement reversed this position: the Court now holds that late payment interests are subject to personal income tax because they represent an increase in the taxpayer’s wealth.
According to this new case law, such income must be declared as capital gains within the general base of the personal income tax (rather than within the savings base, as was previously the case), since the gains do not arise from the sale of assets.
Note: This new classification is more onerous, as the general base is taxed at marginal rates which can exceed 47%, whereas the savings base is taxed between 19% and 30%.
Additionally, the tax authorities require these late payment interests to be declared at their full gross amount. This means you cannot deduct related expenses such as fees paid to advisers, lawyers, or court representatives that were necessary to obtain these interests.
Note: This interpretation is debatable. If you are in this situation, you might consider reducing the declared capital gain by the amount of such expenses. Some years ago, the Tax Appeal Tribunal (TEAC) recognised the possibility of deducting these costs, limited to the amount of the capital gain (without allowing the gain to become negative).
Final observation
Late payment interest paid by the tax authorities to taxpayers must be declared in the personal income tax declaration as capital gains within the general tax base, subject to rates ranging between 19% and 47%. Taxpayers should carefully review their tax declarations to ensure compliance and consider seeking professional advice on the possible deduction of related expenses.
