Late payment interest on unpaid wages is not subject to Personal Income Tax (IRPF) withholding

The Directorate General of Taxes (DGT) has issued a relevant ruling regarding the tax treatment of late payment interest arising from unpaid wages. This resolution addresses the nature of these payments and the withholding obligations that companies must fulfill when forced to pay such amounts, generally due to a judicial ruling.

What the DGT has ruled

The query focused on whether interest for late payment of wages should be subject to withholding for Personal Income Tax (IRPF). The DGT has ruled that this interest is compensatory in nature, as its purpose is to compensate for damages caused to the worker due to the delay in payment.

Due to this nature, the ruling establishes that:

• The interest is taxed as capital gains and not as income from movable capital.
• As it is not income subject to withholding according to Article 75 of the RIRPF, the company must not perform any withholding.
• These amounts must not be included in Form 190, as they are not part of the income subject to withholding that regulations require to be reported.

What it means for you

The impact of this resolution is divided according to the affected profile:

• For companies: Entities that must pay late payment interest due to court rulings regarding wages are not obliged to perform IRPF withholding on these amounts. Likewise, they are exempt from the obligation to report these payments in Form 190.
• For workers: The recipient of this interest should keep in mind that they will receive the gross amount rather than a net amount after withholding. In their tax return, they must declare this income as capital gains.

What should be done

Payroll and accounting departments must adjust their procedures regarding potential payments arising from labor litigation. Since the nature of the concept changes its tax treatment, it is fundamental to verify that the payment is correctly recorded as compensation and not as income from work or capital. It is recommended to assess each particular situation to ensure compliance with the corresponding reporting and withholding obligations.