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V3286-15 26 October 2015 · SG de Impuestos sobre la Renta de las Personas Físicas Criterion in force
IRPF · estimación directa

The payment of compensation for breach of contract is deductible for Personal Income Tax (IRPF) in professional activities

A writer inquires whether the payment of a penalty clause for breach of contract is deductible for her Personal Income Tax (IRPF) and what withholding tax should be applied. The DGT responds that the expense is deductible as it is linked to the activity and that there is no obligation to withhold if the income is not considered to have been obtained in Spain.

The question raised

In the event that she is ordered to pay the penalty, she asks about its impact on Personal Income Tax (IRPF) taxation and the applicable withholding tax on it.

The DGT's ruling

The payment of compensation for contractual liability is a deductible expense in the determination of the net income from the economic activity, as it is not a donation and is related to the generation of income. Regarding withholding, the compensation will not be subject to Non-Resident Income Tax if the activity of the company receiving it is not carried out in Spain nor serves an economic activity in Spanish territory.

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