Personal Income Tax (IRPF) rectification due to the refund of undue productivity bonuses

The Dirección General de Tributos (DGT) has issued a relevant ruling regarding the tax implications of refunding employment income that was unduly received. This scenario often arises when, following a judicial or administrative decision, a worker must repay amounts that were part of their taxable base in previous years.

What the DGT has ruled

The query focused on determining in which tax period the refund of a productivity bonus that had been erroneously collected should be taxed. The DGT has ruled that the tax impact does not occur in the tax year in which the actual refund of the money is made, but rather in the tax period in which said income should have been declared.

In practical terms, if a worker must refund a bonus received in 2017, the rectification must be carried out by affecting the tax return for that specific year. The applicable regulations in this regard are based on Law 35/2006 on Personal Income Tax (IRPF) and Law 58/2003 General Tax Law.

What this means for you

If you find yourself in a situation where you must repay amounts received unduly due to administrative or judicial decisions, you should not treat that refund as a deductible expense in the current tax year. The tax impact must be located in the year in which those incomes formed part of your earnings.

This implies that, if the affected tax year has not expired, the regularization of your tax situation must be carried out by rectifying the tax return for that specific year. The objective is for the taxable base of that period to reflect the economic reality that should have existed at that time.

What you should do

When faced with an obligation to refund employment income, it is necessary to:

• Precisely identify the tax year in which the undue amounts were received.
• Verify whether the tax year in question has not yet expired according to current regulations.
• Carry out the rectification of the tax return corresponding to that year to adjust the taxable base.

Each situation involving the refund of income has particularities that require a detailed analysis of the documentation motivating the repayment.