On April 1 the personal income tax season starts, amid the COVID-19 crisis
Spain Tax Alert
In view of the cash pressures that the current state of emergency may create, it is advisable to bring forward analysis of returns to file them as soon as possible (if a refund of tax is due) and evaluate, in any case all potential tax benefits to be applied.
As known, the state of emergency has not altered the income tax and wealth tax season of this year.
In the same way as in previous years, on this same website taxpayers will be able to change, confirm and file their draft returns, and their wealth tax returns (which can only be filed online).
The season will end on June 30, 2020, except for taxpayers who want to pay their first split personal income tax payments or wealth tax debts through the bank, in which case the return must be filed on or before June 25. Remember that personal income tax payments can be split into two installments (60% on June 30 and 40% on November 5), but wealth tax debts cannot be split and the deadline for their payment ends on June 30.
For the preparation of returns, it is advisable to obtain and review the tax information supplied by the Spanish tax agency (AEAT). Under the Tax Control Plan for 2020, the notices on the tax information document for personal income tax self-assessments of all sources of, domestic and international, income that is known to AEAT will be improved for the purpose of encouraging voluntary compliance.
Among the many issues of interest, it may be worthwhile to pay attention to the following:
In relation to salary income:
Its amount may be reduced by mandatory contributions to professional associations and by the costs of litigation with the employer, within certain limits.
An exemption is available, amounting to up to €60,100, for work performed abroad, which companies will often not have taken into account to calculate tax withholdings.
Regarding economic activities, particular attention is needed to which expenses are deductible and which are not. Expenses that will have to be studied in detail include meal expenses, overheads of the premises where the activity is conducted, depreciation and amortization, etc.
For income obtained from leasing properties, it is recommendable to examine in detail which expenses are allowed to be deducted and to calculate the depreciation of the building correctly, with particular attention to the parameters for calculating this depreciation in cases of inherited buildings or buildings received as gifts. Upkeep and repair expenses or interest expense available to be carried forward from prior years should not be forgotten either. Lastly, it needs to be recalled that the reduction applicable to residential leases is being interpreted restrictively by the authorities.
You should not forget either that a transfer of the principal residence may be exempt from tax if the sale price is reinvested in a new principal residence, and that it is necessary for the exemption to be calculated on the form, even if it is going to be reinvested in later years.
On the subject of gifts, it should not be overlooked that:
Gifts in kind (property and rights) are complex transactions in which personal income tax comes into play as well as gift tax, because they may give rise to capital gains to be reported on the giver’s personal income tax return.
Gifts to not-for-profit entities may give entitlement to a tax credit.
Certain corporate transactions have special tax treatment, including distributions of dividends in kind, distributions of additional paid-in capital or share premium, capital reductions with repayments of contributions, or transfers of shares in unlisted companies. And if the taxpayer has taken part in a transaction for which the business reorganization regime in the Corporate Income Tax Law has been claimed, they need to check whether they have to tick a box on their return, to be entitled to a deferral of tax on the generated income.
There are types of income that deserve particular attention due to their complexity or to their specific nature in relation to including them on the return:
Income obtained from transactions with a deferred price.
Compensation payments received in respect of floor clauses that have been rendered invalid.
Income obtained abroad, which requires attention to its inclusion among the types of income to be reported and to the option of applying double taxation relief mechanisms. For reporting income of this type it will be useful to consider the information included on Form 720 (and for wealth tax purposes).
Procedural interest or costs paid by the authorities.
Income to be allocated for investments in Spanish or foreign pass-through entities; or in transparent entities.
In relation to the rules on including and offsetting income to determine taxable income:
It needs to be checked whether there are any capital losses from prior years that are allowed to be carried forward under the offset rules or as a result of the rules not allowing losses to be reported in cases of asset repurchases.
It needs be taken into account that losses not obtained from transfers of assets rights and liabilities are included in the general component of taxable income.
Contributions to pension plans and other employee benefit instruments, including contributions in favor of the spouse in certain circumstances, may be used to reduce taxable income. It needs to be checked whether there are any contributions to pension plans made in prior years that may be carried forward for deduction.
And it is advisable that tax credits allowed by the various autonomous communities are not forgotten.