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V3270-19 27 November 2019 · SG de Impuestos sobre la Renta de las Personas Físicas Criterion in force
IRPF · indemnización

Compensation for material and non-material damages via out-of-court settlement is taxable as a capital gain

A query was raised regarding whether compensation for non-material and material damages agreed upon out of court is exempt from Personal Income Tax (IRPF). The Directorate General for Taxes (DGT) ruled that it is not exempt and must be taxed as a capital gain.

The question raised

Taxation of the aforementioned compensation. Application of the exemption provided for in Article 7.d) of the Personal Income Tax Law.

The DGT's ruling

The compensation is not exempt because Article 7.d) of the Personal Income Tax Law does not include material damages and, in the case of moral damages, the amount is not legally or judicially recognized as it is an out-of-court settlement. This income constitutes a capital gain quantified by the amount received, without the possibility of reducing management or legal fees, as these are considered consumption income. The compensation is included in the general part of the income.

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