Impact of COVID-19 on Personal Income Tax (IRPF)

EMPLOYEES UNDER A TEMPORARY LAYOFF SCHEME

Employees affected by a temporary layoff scheme (ERTE) may find that their Personal Income Tax (IRPF) return for the 2020 tax year is affected in two ways:

• First, they may go from having no obligation to file a return to being required to do so. Recall that, under the rules governing the tax, taxpayers who receive employment income of €22,000 or less per year are not required to file a return, provided that such income comes from a single payer. Where there are two or more payers and the sum of the amounts received from the second and subsequent payers exceeds €1,500, this threshold is lowered to €14,000 per year. The benefit received as a result of an ERTE is paid by the State Public Employment Service (SEPE), so there will be two payers. Therefore, insofar as such benefits exceed €1,500, a return must be filed if total employment income exceeded €14,000 per year.
• Withholding applied to the ERTE benefit. The withholding rate applied to benefits paid by the SEPE is lower than the rate the employer generally applies to the employee. Consequently, unless the taxpayer requests a higher withholding rate, in most cases where withholding is not adjusted, the income tax return will show an amount payable.

IMPACT OF AN ERTE ON CERTAIN TAX CREDITS

Maternity tax credit

Mothers who were entitled to the maternity tax credit (because they have children under the age of 3) and who have been affected by an ERTE will lose the right to the tax credit for the months they are under the ERTE. This tax benefit requires the taxpayer to carry on a self-employed or employed activity, and, under paragraph 2 of Article 208 of the consolidated text of the General Social Security Law, a taxpayer under a temporary layoff scheme in which the employment contract is suspended is in a situation of total unemployment. This applies only where the ERTE suspends the contract. If it is an ERTE reducing working hours (a “partial ERTE”), the tax credit could continue to be applied.

Tax credit for large families, for a parent with two children, or for dependent persons with disabilities

As in the previous case, for taxpayers entitled to this tax credit who are or have been under an ERTE, one of the requirements is to carry on a self-employed or employed activity. Since a suspension ERTE entails being in a situation of unemployment, the right to this tax credit will be lost for the time the taxpayer is under the ERTE.

RENEGOTIATION OF RENT

Because of the state of alarm (estado de alarma) declared due to the COVID-19 crisis, leases may have been affected by non-payment, by an agreement to reduce the rent, or by an agreed moratorium. The IRPF consequences will differ depending on the taxpayer’s situation.

In any event, we are referring to rent received that is taxed as rental income (income from real estate).

• Deferral of rent payments: Where the parties agree to defer rent payments, no rental income should be reported for the months in which payment has been deferred, since the date on which the rent falls due has been deferred (the income is not to be allocated because it is not yet due).

However, the expenses incurred in that period may be deducted, provided they are expenses necessary for leasing the property.

• Reduction of rent: when calculating net rental income, it must be borne in mind that changes in the amount set as rent (whatever the amount of the reduction) will mean that the gross rental income for the periods affected will be the new amounts agreed by the parties. As in the previous case, all expenses incurred by the landlord during that period will also be deductible, provided they are expenses necessary for the lease.
• Non-payment of rent: A different case arises where the rent has been neither deferred nor reduced but has simply not been paid when due. In this case, reference must be made to Article 13 of the IRPF Regulations, which provides for the deductibility of “doubtful debts.”

“Where a doubtful debt is collected after it has been deducted, it shall be computed as income in the tax year in which it is collected.” From all of the above, the following may be concluded in the event of non-payment of rent:

1. The amounts corresponding to the lease of the premises must be included in 2020 as gross rental income, even if they have not been received.

2. The doubtful debts may be deducted as an expense from the gross income computed once the six-month period required by the regulations has elapsed, or when the debtor is in insolvency proceedings (concurso).

• If the debt is collected after it has been deducted as an expense, the income must be computed in the year in which it is collected.

Expenses incurred in that period will also be deductible.

In the case of non-payment, as in the other two cases (change in the amount of rent and deferral of its due date), the deemed income from real estate (imputación de rentas inmobiliarias) provided for in Article 85 of the Personal Income Tax Law (LIRPF) does not apply. For leases of real estate used as a dwelling, the reduction established in the aforementioned Article 23.2 of the LIRPF applies.

(V1553-2020PDF, V1375-20PDF)

RENTAL AID OR SUBSIDIES

Aid or subsidies received to pay rent are not exempt from IRPF, so, in principle, they must be included in the return as a capital gain. It should be borne in mind that, in some cases, this may give rise to an obligation to file a return.

COMPUTATION OF INCOME IN KIND FOR COMPANY CARS

The Directorate General for Taxation (DGT) has ruled on the treatment of vehicles made available by companies to their employees during the state of alarm. It concluded that remuneration in kind must be computed for the entire period, that is, without deducting the time during which the state of alarm was in force. In its view, the attribution of remuneration in kind to the taxpayer derives from obtaining the right to use the vehicle. Such remuneration exists insofar as the taxpayer is able to use the vehicle for private purposes, regardless of whether it is actually used for those purposes. In addition, the DGT points out that the state of alarm does not entail the immobilization of the vehicle, but rather a restriction on permitted travel.

(V1387-20PDF)

DEEMED INCOME FROM REAL ESTATE FOR SECOND HOMES

With regard to second homes that are neither leased nor used in a business activity, the DGT considers that the rule governing this income does not depend on actual use of the home but on whether it is available to its owner. Accordingly, the deemed income from real estate must be computed without excluding the period during which the state of alarm was in force.

(V1375-20)

EXEMPTION FOR REINVESTMENT IN A MAIN RESIDENCE

For the purposes of computing the two-year period for reinvesting the proceeds from the sale of the former home in a new home, the DGT has interpreted that the running of this period is suspended from March 14, 2020 (the date of entry into force of Royal Decree 463/2020, declaring the state of alarm) until May 30, 2020.

(V1115-20PDF)

EXEMPTION FOR REINVESTMENT IN A LIFE ANNUITY BY TAXPAYERS OVER 65

The rules set a 6-month period within which the capital gain obtained on the transfer of any asset must be reinvested in a life annuity. The DGT has also established that the running of this period is deemed suspended from March 14, 2020 (the date of entry into force of Royal Decree 463/2020, declaring the state of alarm) until May 30, 2020.

Remember that this exemption applies only to taxpayers over the age of 65.

(V1324-20PDF)

TAX RESIDENCE

The days on which the state of alarm was in force are not excluded from the computation for determining tax residence. Therefore, if a person who is in principle resident in another country remains in Spanish territory for more than 183 days in 2020, that person will be considered an IRPF taxpayer.

This problem may well affect residents of other countries who were in Spain when the state of alarm was declared and were unable to return to their countries of residence owing to mobility restrictions, flight cancellations, or other restrictions.

TAXPAYERS UNDER THE MODULES SYSTEM (MÓDULOS)

• IRPF taxpayers who carry on business activities (except agricultural, livestock, and forestry activities) and determine their net income from those activities under the objective assessment method (estimación objetiva) do not count, when calculating the amount of each installment payment, the calendar days in each calendar quarter during which the state of alarm was in force as days on which the activity was carried on. Although the rules do not provide for the same measure for calculating annual income, it is foreseeable that, before the end of the year, a legal provision will expressly exclude those days from the days on which the activity is carried on, thereby allowing the module to be reduced.
• Taxpayers under the modules system were given the option of opting out of that method within the deadline for filing the first-quarter installment payment (a deadline that was extended to May 20). Taxpayers who opt out may return to the modules system without having to wait for three years to elapse, as the rules otherwise require.

Royal Decree-Law 15/2020, of April 21, on additional urgent measures to support the economy and employment.

(V1101-20)

BENEFITS RECEIVED BY SELF-EMPLOYED WORKERS

Extraordinary benefits that self-employed workers may have received because of the COVID-19 crisis, such as the extraordinary benefit for cessation of activity, are taxed under IRPF as employment income.

Therefore, these benefits must not be included as income for the quarter in Form 130 (IRPF installment payment).

TAX CREDIT FOR DONATIONS

Royal Decree-Law 11/2020 increases the IRPF tax credit for donations by 5 percentage points for donations made to support efforts against COVID-19. In these cases, donations to the entities covered by Law 49/2002 qualify for the following tax credit:  

PENSION PLAN WITHDRAWALS

The twentieth additional provision of Royal Decree-Law 11/2020, of March 14, allowed early withdrawal from pension plans in the following cases:

• Employees who are unemployed as a result of an ERTE arising from the COVID-19 health crisis.
• Business owners of establishments whose opening to the public has been suspended.
• Self-employed workers who have ceased their activity as a result of the COVID-19 health crisis.
• Self-employed workers who have not ceased their activity but whose turnover in the month preceding the request for access to the pension plan fell by at least 75% compared with their average turnover for the previous calendar half-year.

Withdrawals from the pension plan may be made within six months from March 14, and the amount that may be withdrawn is subject to legal limits that vary by case.

However, the tax consequences of withdrawing funds from a pension plan remain unchanged: the amounts obtained are taxed as employment income and must be included in the general tax base. In this regard, it should be remembered that a transitional regime applies to contributions made before January 1, 2007, allowing a 40% reduction when the funds are withdrawn as a lump sum.