Income Tax: Taxation of refunds on FLOOR CLAUSES

Income Tax: Taxation of refunds on FLOOR CLAUSES

A new forty-fourth additional condition is added to Act 35/2006, of 28 November, on Personal Income Tax and the partial modification of acts on Corporation Tax, on Income Tax for Non-Residents and on Wealth Tax.

The aim of this additional condition is to regulate the tax effects of the refunding by financial entities of interest already paid by taxpayers as a result of interest rate limitation clauses on loans certified with them, whether the refunds arise from an agreement between the parties or as a result of a court order or an arbitration decision.

Section 1 of the additional condition establishes that the amounts refunded as a result of agreements held with financial entities, in cash or equivalent compensation measures, that have already been paid thereto in the form of interest due to interest rate limitation clauses on loans, should not be included in the gross tax base.

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 floor clauses.

However, the condition establishes a series of adjustment cases, where interest may have formed part of the deduction for investments in primary residences or deductions established by the Autonomous Community Authorities, or have been considered deductible expenses.

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

When the taxpayer has applied the deduction for investment in primary residence or deductions established by the Autonomous Community Authorities for amounts received, they shall lose their entitlement to the 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 shall not be applicable with respect to the amounts allocated directly by the financial entity to reducing the loan capital, after reaching the agreement with the taxpayer in question. 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 prior years' tax returns the amounts now received as a deductible expense, these shall no longer be treated as deductible and complementary returns shall be filed for the corresponding years, removing these expenses, without applying any interest on arrears or surcharge of any kind.

The term for filing the complementary 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 condition is the years that these adjustments affect, both in the case of deductions for investment in primary residence and deductions established by Autonomous Community authorities, and in the base of 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:

The taxpayer had applied the deduction for investment in primary residence or deductions established by Autonomous Community authorities, for amounts received:

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.

In the case that the amounts refunded included interest for 2016, these amounts would not be taken into account when applying the deduction for investment in primary residence that year.

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 term for filing the Income Tax Return for 2016 (30 June 2017), the interest for 2016 will not be taken into account when applying the deduction for investment in primary residence and, therefore, the adjustment will not affect that year.

The taxpayer had included the amounts now perceived as deductible expenses in prior years:

The agreement with the financial entity, the ruling or the arbitration decision was made between 6 April 2016 and 4 April 2017. In this case, complementary 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 refunded include interest paid in 2016, the taxpayer shall no longer include these amounts in their tax return as deductible expenses.

The agreement with the financial entity, the ruling or the arbitration decision was made after 4 April 2017. In this case, complementary 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 complementary 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.