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V2156-14 5 August 2014 · SG de Impuestos sobre la Renta de las Personas Físicas Criterion in force
IRPF · indemnización

Compensation for financial loss resulting from breach of contract is taxed as a capital gain

A couple inquired whether compensation for damages claimed against a developer for failing to deliver agreed properties would be exempt from Personal Income Tax (IRPF). The Directorate General for Taxes (DGT) ruled that, as these are financial losses rather than personal injury, the amount must be taxed as a capital gain.

The question raised

Taxation of the compensation in Personal Income Tax.

The DGT's ruling

The exemption under Article 7.d) of Law 35/2006 is limited to compensation for personal damages (physical, psychological, or moral). Compensation for economic loss or patrimonial damages does not benefit from said exemption. In this case, the compensation must be classified as a capital gain pursuant to Article 33.1 of the Personal Income Tax Law, being integrated into the general taxable base.

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