Regulatory developments 2017

Main tax changes introduced by Royal Decree-Law 1/2017, dated 20 January, approving urgent measures for consumer protection in the area of floor clauses

PERSONAL INCOME TAX

A new Additional Provision forty-fifth is added to Law 35/2006 of November 28, on Personal Income Tax and partial modification of the laws on Corporate Tax, Non-Resident Income Tax and Wealth Tax.

The purpose of this Additional Provision is to regulate the tax effects derived from the repayment by financial institutions of the interest previously paid by taxpayers as a result of the clauses limiting interest rates on loans agreed with them, whether the repayment of such amounts derives from an agreement between the parties or whether is the result of a court ruling or an arbitration award.

The Additional Provision establishes in its section 1 that the amounts returned derived from agreements entered into with financial entities, either in cash or through the adoption of equivalent compensation measures, previously satisfied to those in the concept of interests for the application of clauses limiting interest rates on loans, should not be included in the tax base of the tax.

Indemnifying interest relating to these shall not be included in the gross tax base either.

Therefore, the Personal Income Tax return should not include amounts received as a result of refunds of interest paid or indemnifying interest recognised on the application of land clauses.

However, it establishes certain assumptions for regularization, in cases where said interests had formed part of the deduction for investment in habitual residence or deductions established by the Autonomous Communities, or had been considered a deductible expense.

For these purposes, section 2 of this provision regulates both cases:

When the taxpayer has applied at the time the deduction for investment in habitual residence or regional deductions for the amounts received, will lose the right to his deduction. In this case, it should include the amounts deducted in the Personal Income Tax return for the year in which the ruling, arbitration decision or agreement was made with the entity, in the terms set forth in article 59 of the Personal Income Tax Regulations, but without including interest on arrears.
In this regard, if the ruling, arbitration decision or agreement took place during 2016, the 2016 Personal Income Tax return (to be filed in April, May, June of 2017) should include these amounts in boxes 524 and 526, and it is not necessary to fill in boxes 525 and 527, corresponding to interest on arrears.

This treatment is the same as generally used for cases of loss of entitlement to deductions on primary residences but without including interest on arrears.

This adjustment will not apply to amounts that are directly allocated by the financial institution, following an agreement with the affected taxpayer, to reduce the principal of the loan. That is to say, if the financial entity, instead of refunding to the taxpayer the amounts paid, reduces the loan principal by the corresponding amount, the deductions made prior thereto corresponding to these amounts shall not have to be adjusted. Moreover, the reduction of the loan principal shall not entitle the taxpayer to a deduction for investment in a primary residence either.
In the event that the taxpayer had included, in declarations from previous years, the amounts now received as deductible expenses, these will lose such consideration and must submit supplementary declarations for the corresponding years, removing said expenses, without penalty or late payment interest or surcharge.

The term for filing the supplementary tax returns shall be between the date of the ruling, arbitration decision or agreement and the end of the following self-assessment tax return filing period for this tax.

Another issue regulated by the rule is the exercises that are affected by these regularizations , both for housing or regional deductions and for deductible expenses. In this regard, it establishes that it will only be applicable to the years for which the Administration's entitlement to determine the tax payable had not prescribed.

The way in which the adjustment is made shall vary depending on whether the taxpayer has applied a deduction for investment in primary residence, deductions established by Autonomous Community authorities, or deductions in expenses, and the year in which the agreement, ruling or arbitration decision is made. Specifically, the following cases may arise:
1. The taxpayer had applied the deduction for investment in primary residence or deductions established by Autonomous Community authorities, for amounts received:
  1. Sentence, arbitration decision or agreement of 2016: In this case the adjustment of the amounts deducted would be made in the 2016 tax return (filed in April, May, June of 2017) and shall affect, in general terms, the deductions made in 2012, 2013, 2014 and 2015.
    If the amounts returned include interest from 2016, these will no longer be taken into account when applying the housing deduction for that year.
  2. Agreement with the financial institution, ruling or arbitration decision of 2017: In this case the adjustment of the amounts deducted would be made in the 2017 tax return (filed in April, May and June of 2018) and shall affect, in general terms, the deductions made in 2013, 2014, 2015 and 2016.
    However, if the ruling or agreement is prior to the end of the deadline for filing the 2016 personal income tax return (June 30, 2017), the interest for 2016 will not be taken into account when applying the deduction for housing and, therefore, the adjustment will not affect that year.
2. The taxpayer had included the amounts now perceived as deductible expenses in prior years:
  1. The agreement with the financial institution, the judgment or the award, has been produced from on April 6, 2016 until April 4, 2017. In this case, supplementary tax returns should be filed as a general rule for 2012, 2013, 2014 and 2015, within the filing period for 2016 Personal Income Tax (April, May and June of 2017).
    If the amounts returned include interest paid in fiscal year 2016, the taxpayer will no longer include these amounts as deductible expenses in their tax return.
  2. The agreement with the financial institution, the judgment or the award has occurred after April 4, 2017. In this case, supplementary tax returns should be filed as a general rule for 2013, 2014, 2015 and 2016, within the filing period for 2017 Personal Income Tax (April, May and June of 2018).
    However, if the ruling or agreement is prior to the end of the term for filing the Income Tax Return for 2016 (30 June 2017), the interest for 2016 will not be taken as a deductible expense and, therefore, no supplementary tax return will be necessary for that year.
Lastly, if the taxpayer had already adjusted these amounts based on a prior ruling, they may call for the self-assessed tax returns filed to be rectified, claiming the refunding of the interest on arrears paid and, if applicable, the modification of the indemnifying interest declared as a gain.

Next Main tax changes introduced in Law 6/2017, of October 24, on urgent reforms of self-employment.