The receipt of benefits for cessation of activity of the self-employed, or for ERTE, the reinvestment in main residence or in life annuities, the days of exercise of the economic activity, the agreements to reduce or defer the payment of rent, the tax residence or the deduction of certain expenses, have been the subject of consultation before the General Directorate of Taxes (DGT).
The various measures approved by the Government to curb the health and economic crisis caused by the COVID-19 coronavirus have repercussions in the tax field, and specifically in the Personal Income Tax (IRPF). Many aspects may raise questions and have been the subject of inquiries to the Directorate General of Taxes. These include, for example, the receipt of benefits for self-employed workers who have ceased their activity or for temporary layoffs (ERTE), reinvestment in primary residences or life annuities, the number of days of business activity, agreements to reduce or defer rent payments, tax residency, and the deduction of certain expenses.
Let's look at some of the DGT's queries on these topics.
- 2-year period for the exemption for reinvestment in main residence
Article 38 of the Personal Income Tax Law (LIRPF) provides for the exemption of capital gains obtained from the transfer of the main residence, provided that the amount obtained is reinvested in the acquisition of a new main residence within 2 years before or after the transfer of the former.
As the limitation and expiry periods for actions and rights contemplated in tax regulations were suspended by Royal Decrees 8 and 15/2020, the aforementioned two-year period was suspended from March 14, 2020, to May 30, 2020. The Directorate General of Taxes (DGT) has ruled on this matter in several consultations: DGT V3659-20, of December 29; DGT V2767-20, of September 10; DGT V1117-20, of April 28; DGT V1118-20, of April 28; DGT V1115-20, of April 28; DGT V1232-20, of May 4; DGT V2837-20, of September 22; and DGT V3587-20, of September 17. December, DGT V3659-20, of December 29, DGT V0033-21, of January 15, and DGT V0084-21, of January 22.
- 6-month period for the exemption for reinvestment in life annuities
The legally established six-month period for reinvestment in life annuities was also suspended during the state of emergency. Therefore, the calculation of the period for reinvestment in life annuities should be considered suspended from March 14, 2020, to May 30, 2020 (DGT V2034-20, of June 19).
- Time limit for calculating the period of economic activity
The calendar days during which the state of alarm was declared are not counted in the quarterly installments of the Personal Income Tax and the VAT advance payment in 2020. Specifically, in the first quarter of 2020, 18 days out of a total of 91 must be excluded. Therefore, the reduction to be applied to the payments of both taxes will be 18/91 (DGT V1971-20, of June 16 and DGT V1101-20, of April 28).
The quarterly advance payments of Personal Income Tax (IRPF) to be made by taxpayers who determine their net income using the objective estimation method are calculated in the fourth quarter of 2020. These payments are calculated normally, without counting as days of business activity the calendar days on which the effective exercise of the economic activity was suspended as a result of the measures adopted by the competent authority to address the evolution of the epidemiological situation derived from COVID-19. For the calculation of the quarterly advance payment of IRPF, only the number of calendar days in the quarter in which the activity was carried out will be taken into account (DGT V0082-21, of January 22).
- Agreements to reduce or defer rent payments
As a result of the difficult economic situation of tenants due to the health crisis caused by COVID-19, it has been possible to reduce or defer the payment of rent.
In the event of a rent reduction, the landlord will include the new amounts agreed upon by the parties as full income for those months, regardless of the amount. In the event of a payment deferral, the landlord will allocate the full income for these months according to the due dates of the new payment deadlines agreed upon by the parties. In both cases, necessary expenses will remain deductible, and no imputation of rental income will apply as the property remains leased (DGT V0985-20, of April 21, and DGT V1553-20, of May 22).
Another scenario would be one in which the landlord does not agree to modify or reduce the fixed rent amount (regardless of the amount of the reduction) nor agree to postpone payment, resulting in non-payment of rent when it is due. In case of non-payment of rent:
1. The consultant must impute in the year 2020, as full income from real estate capital, the amounts corresponding to the lease of the premises, even if they have not been received.
2. From the total computed income, the doubtful balances may be deducted as an expense once the aforementioned three-month period has elapsed, or when the debtor is in a situation of bankruptcy.
If the debt is collected after it has been deducted as an expense, the income must be recorded in the year in which the collection occurs.
In the case of non-payment, as in the two remaining cases (modification of the amount of the rent and deferral of its enforceability), the expenses incurred in said period may be deducted, without the imputation of real estate income provided for in article 85 of the LIRPF being applicable, the reduction established in the aforementioned article 23.2 of the LIRPF being applicable when it is a lease of real estate intended for housing (DGT V0081-21, of January 22).
- Deduction of supplies by professional
Utility expenses for the home where business activity was carried out during the COVID-19 pandemic due to the inability to access the professional office are not deductible. In cases of occasional use of the primary residence for business purposes, due to the inability to access the office after the declaration of the state of emergency, the Spanish Directorate General of Taxes (DGT) has determined that the cost of utilities used is not deductible, as the home is not considered to be partially dedicated to business activity, but rather used due to an occasional and exceptional circumstance (DGT V3461-20, of November 30).
- Tax residence
The time tourists spend in Spain due to the state of emergency counts towards determining whether they have stayed more than 183 days in Spanish territory. If they spent more than 183 days in Spain in 2020, they will be considered taxpayers for Personal Income Tax (IRPF) purposes (DGT V1983-20, of June 17).
- vehicle income tax
The vehicle provided for private use will be taxed as income in kind during the state of emergency, even if the vehicle was immobilized. The declaration of the state of emergency does not imply the immobilization of the vehicle, and it is irrelevant, for the purposes of classifying it as income in kind, whether or not it was used for private purposes (DGT V1387-20, of May 13).
- Second homes
The declaration of a state of emergency due to the health crisis caused by COVID-19 has no effect on the imputation of real estate income for owners of second homes, which are not rented out or used for any economic activity and which do not constitute the owner's usual residence.
Therefore, and as concluded by DGT V1474-20 of May 19, 2020: "the imputation of real estate income does not take into account the effective use of the second home but its availability to its owner, without the Law considering circumstances that may affect said use, such as illness, work or others that determine the impossibility of going to it due to the limitation of mobility as a consequence of the State of Alarm", the imputation of real estate income provided for in art. 85 of the LIRPF is appropriate.
- Temporary Layoff Benefits
Erroneous payments from the SEPE (Spanish Public Employment Service) in 2020 will not be considered in the 2020 Income Tax return if the Administration has already declared the payment invalid. Since the receipt of these amounts has not yet been declared, as they were received in the 2020 tax year and are pending declaration, no action will be taken regarding Personal Income Tax. Therefore, they will not be reflected in the corresponding 2020 tax return once declared invalid by the paying administration, as they do not constitute income (DGT V0016-21, of January 13).
- Cessation of self-employed activity
In several consultations, the DGT determines that the extraordinary benefit is considered as income from work because it is an unemployment benefit in a broad sense, and not only encompassing the situation of cessation of activity corresponding to employees (DGT V0098-21, of January 28, DGT V0101-21, of January 28 or DGT V0099-21, of January 28).
Furthermore, in DGT ruling V0071-21, dated January 22, the court analyzes what happens in cases where there has been an exemption from paying self-employed social security contributions. The total or partial exclusion from paying RETA (Special Regime for Self-Employed Workers) contributions, resulting from the absence of an obligation or an exemption, determines its lack of impact on the tax, as it does not correspond to any of the income-generating scenarios established in Article 6 of the Personal Income Tax Law (LIRPF). Therefore, it does not constitute gross income nor, correspondingly, a deductible expense for determining income.
- Exclusion from the objective estimation regime
In a case where the taxpayer was excluded from the objective estimation method in 2019 because their gross income exceeded the threshold in 2018, and in 2020, due to COVID-19, their gross income did not exceed the threshold for exclusion from the method, Article 34 of the Personal Income Tax Regulations (RIRPF) stipulates that the affected taxpayer will be excluded from the objective estimation method for at least the following three years. In this case, the exclusion occurred in 2018, so in the following three years (2019, 2020, and 2021), the taxpayer must determine the net income from the business activity using the direct estimation method, regardless of whether the thresholds defining the scope of application of the method were met in those tax years. Therefore, in 2021, the interested party must determine the net income of their activity by the direct estimation method (DGT V0028-21, of January 15).
In DGT V0128-21, of January 29, it is explained that the exceptional measure relating to the reduction of the tax periods affected by the waiver of the objective estimation method in IRPF of 2020 and 2021, established in art. 10 RDL 35/2020, is only provided for cases of waiver of the objective estimation method for the tax periods 2020 and 2021 and does not affect the causes of exclusion to the objective estimation method.
- Subsidies received due to suspension of activity or drop in income
The Autonomous Communities have granted subsidies to self-employed workers facing difficulties, including, among other contingencies, the suspension of activity or a drop in income as a result of the COVID-19 pandemic. If the subsidy is used to offset expenses for the fiscal year or the loss of income, it will be treated as a current subsidy, that is, as income in the fiscal year. If it is intended to support investments in fixed assets or multi-year projected expenses, it will be treated as a capital subsidy and will be recognized as the investments are amortized or the expenses incurred are charged to it. When the assets are not subject to amortization, the subsidy will be recognized in full in the fiscal year in which the asset financed by the subsidy is sold or removed from inventory (DGT V0105-21, of January 28).
- Type of retention
Regarding the applicable withholding tax rate in the event of extensions of temporary contracts due to COVID-19, the Spanish Tax Agency (DGT) issued ruling V3049-20 on October 8. In the context of providing dual employment workshops within the Autonomous Community of Galicia, the City Council, as the promoting entity, hired teaching and management staff on December 2, 2019, for a nine-month period to deliver a workshop. The minimum withholding tax rate of 2 percent has been applied to the remuneration of the initial nine-month contract for these teaching and management staff. The question now arises as to whether this minimum rate applies to the contract extension for the duration of the workshop's suspension. In this regard, it should be noted that this circumstance (the extension) is one of those that requires adjusting the withholding tax rate. As for the resulting rate after adjustment, the 2 percent minimum rate will still apply, since the extension is also for a period of less than one year.
You can contact this professional office for any questions or clarifications you may have.
Warm regards,
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A Àmbit Assessor, SL has 40 years dedicated to the tax, comptable and labor consultancy of the Pime.
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