Compensations for former administrators will be taxed with 35% or 19% withholdings

The legal nature of the economic compensations received after having held administrative positions has been defined by the tax administration. In a recent binding ruling, the applicable tax treatment for these payments and the withholding rate that entities must apply have been specified.

What the DGT has resolved

The Dirección General de Tributos (DGT) has determined that the economic compensation granted for having held the position of administrator for a minimum period of ten years is classified as employment income. This criterion is based on Article 17.2.e) of the Personal Income Tax Law (LIRPF).

As it is considered employment income, the withholding that must be applied is not the general one, but the specific one established in Article 101.2 of the LIRPF. The applicable withholding rate will be 35%, unless the paying entity has a turnover of less than 100,000 euros, in which case the 19% rate will apply.

What this means for you

If you are the person receiving this compensation due to your former status as an administrator, you should take into account that this income will be taxed under the rules for employment income and not under other income categories. This implies that the impact on your immediate withholding will be significant, given that the aforementioned specific rates will be applied.

For companies making these payments, the relevance is operational. The entity is obliged to correctly apply the corresponding withholding rate according to its turnover, whether it is 35% or 19%, to comply with its withholding duties in accordance with current regulations.

What should be done

It is necessary to verify the nature of the payment and the turnover of the paying entity to determine the exact withholding rate that must be applied. Since the classification of this income as employment income has direct implications for the settlement of Personal Income Tax (IRPF), it is recommended to assess each particular situation to ensure compliance with the tax obligations of both the recipient and the company.