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V1161-19 28 May 2019 · SG de Impuestos sobre la Renta de las Personas Físicas Criterion in force
IVA · indemnización por daños

Insurance payouts are exempt from VAT and treated as income or capital gains for Income Tax purposes

An accommodation business owner has enquired about the tax treatment of insurance compensation and loan amortisation following a fire. The Directorate-General for Taxes (DGT) has ruled that the compensation is not subject to VAT and, for Income Tax purposes, it is treated as business income or a capital gain, depending on the circumstances.

The question raised

Various issues regarding VAT and Personal Income Tax, which are described in the response.

The DGT's ruling

Regarding VAT, compensation for damages is not consideration for a taxable transaction and must not include tax. Regarding Personal Income Tax, compensation for loss of profits is considered income from economic activity. Compensation for the loss of real estate is a capital gain or loss derived from an asset used for business purposes, calculated using the book value. The amortization of the mortgage loan has no impact on these treatments.

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