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V0677-21 23 March 2021 · SG de Impuestos sobre la Renta de las Personas Físicas Criterion in force
IRPF · indemnización por responsabilidad civil

Compensation for non-pecuniary damages is exempt from Personal Income Tax (IRPF), but material damages and legal costs may be taxable

A taxpayer inquires about the taxation of a judicial compensation for medical negligence that includes non-pecuniary damages, child-rearing expenses, default interest, and legal costs. The DGT clarifies that only personal (non-pecuniary) damages are exempt, whereas material damages, non-exempt default interest, and legal costs (net of expenses) are taxed as capital gains.

The question raised

Question raised: Taxation under Personal Income Tax (IRPF).

The DGT's ruling

Compensation for personal damages (physical, psychological, or non-pecuniary) determined judicially is exempt pursuant to Article 7.d) of the Personal Income Tax Law. Material damages (such as child-rearing expenses) are not exempt and are taxed as capital gains in the general tax base. Default interest on an exempt compensation is also exempt; however, if the compensation is for material damages, the interest is taxed as capital gains in the savings tax base. Regarding legal costs, the prevailing party may deduct the expenses incurred from the amount received, being taxed only if there is a surplus.

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