15% withholding tax on processing wages for back pay from previous years

The Directorate General of Taxes (DGT) has issued a relevant ruling regarding the tax treatment of processing wages. This issue arises from the need to determine the applicable withholding rate and the base upon which it must be calculated when dealing with payments derived from court rulings that recognize rights from past years.

What the DGT has ruled

The tax authority has clarified that processing wages must be attributed to the tax period in which the ruling recognizing said right becomes final. Since these are earnings corresponding to previous years, the ruling establishes that a withholding rate of 15% must be applied to the full amount of the processing wages.

Furthermore, it has been specified that the withholding is carried out at the time of payment, but its attribution corresponds to the period in which the income is recognized. A key point is that unduly received unemployment benefits should not be deducted when calculating the withholding tax base; the tax must be applied to the total amount of the recognized wages.

What this means for you

This ruling has direct implications for both companies and workers:

• For companies: They are obliged to apply the 15% withholding tax to the full amount of the processing wages paid as back pay.
• For workers: They must pay tax on these wages in the tax year in which the court ruling becomes final, not in the year to which the wages originally correspond.

What should be done

Upon receiving a court ruling that recognizes wages from previous years, it is necessary to verify the date on which the resolution becomes final to determine the correct tax year. It is essential to ensure that the withholding calculation is performed on the full base, without making deductions for unemployment benefits, in order to comply with the regulations of the Personal Income Tax Law (LIRPF) and its Regulations (RIRPF).