Court-ordered compensation: the difference between moral damages and loss of earnings for IRPF

The Dirección General de Tributos (DGT) has clarified the tax treatment of compensation received for civil liability following a court judgment. This criterion is fundamental for determining which part of a financial compensation is tax-free and which part must be included in the Personal Income Tax (IRPF) taxable base.

What the DGT has resolved

The inquiry focuses on the application of Article 7.d) of Law 35/2006. The DGT establishes that the tax exemption is only applicable to compensation for civil liability that covers personal damages, whether physical, psychological, or moral in nature, provided they have been judicially determined.

However, the criterion clearly distinguishes this exemption from the concept of loss of earnings (lucro cesante). Loss of earnings, understood as compensation for wages or income that the person failed to receive due to the damage, is not considered personal damage. Therefore, this amount must be taxed as employment income pursuant to Article 17.1 of the IRPF Law.

What this means for you

If you are an individual receiving court-ordered compensation, you must break down the total amount into its constituent concepts to avoid errors in your tax return:

• Personal damages: Amounts intended to repair physical, psychological, or moral damage are exempt from taxation.
• Loss of earnings: Amounts compensating for the loss of income or wages must be declared as employment income.

Regarding the timing of the declaration, this income must be attributed to the tax period in which the court judgment becomes final. Nevertheless, it is possible to apply the 30% reduction if the period during which said income was generated exceeds two years.

What you should do

In the event of a civil liability judgment, it is necessary to analyze the breakdown of the compensation to correctly identify the exempt concepts and those subject to taxation. The correct distinction between personal damage and loss of earnings is decisive for calculating the tax burden. It is recommended to assess each particular situation to ensure that the attribution of income is made in the correct tax year according to the finality of the judicial resolution.