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V1532-24 21 June 2024 · SG de Impuestos sobre la Renta de las Personas Físicas Criterion in force
IRPF · rendimientos del trabajo

Damages for breach of contract taxed as employment income and interest as capital gains

A taxpayer received compensation for damages resulting from a failure to enter into a contract following a court ruling. The DGT has determined that the amount corresponding to unpaid wages constitutes employment income, while the late payment interest is classified as a capital gain.

The question raised

Taxation under Personal Income Tax (IRPF).

The DGT's ruling

Compensation for unpaid wages due to delay in contracting constitutes earned income, as it replaces unpaid wages. It is not an exemption for personal injury, but rather for material or financial damages. Late payment interest for said breach is compensatory in nature and must be taxed as a capital gain integrated into the general tax base.

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