Exemption from the public maternity allowance

The exemption from the public maternity allowance has given a not expected turn to the tax authorities’ approaches.

On October 2, 2018, the Supreme Court established the doctrine regarding public maternity benefits. The decision 1462/2018 determines that the collection paid by the public institute would have an exempt income treatment in the IRPF. Until now, only the benefits paid by the Autonomous Communities or local entities were considered exempt.

What is an exempted income?

The exempted income is a taxable income that is not subject to tax. The Law has granted those incomes the benefit of not being taxed. That is, they are income on which there is no tax obligation despite the fact that a taxable event has occurred.

In the scope of personal income tax, exempted income is regulated in Article 7.

What types of income are exempt from income tax?

Income classified as exempt, and not subject to taxation, is usually due to political, economic or personal reasons. Article 7 mentioned above includes, among others, the ones indicated below:

• extraordinary benefits for acts of terrorism
• help for those affected by HIV
• severance payments (with limits)
• disability benefits
• public grants
• certain relevant literary, artistic or scientific awards (under certain conditions)
• Unemployment benefits (one-time payment)
• Rewards for participating in peace missions

In addition, Article 7 (h) includes an exemption:

Public benefits for dependent children; birth and adoption; orphanhood and maternity of the Autonomous Communities and Local Entities.

This exemption has been in force since the approval of the Personal Income Tax Law in 2006. It is precisely its interpretation that has given rise to the legal proceedings brought by ruling 1462/2018.

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What does the Supreme Court’s decision establish regarding the benefits received by the Social Security?

The discussion within the process has been determined, mainly, by who was the subject that granted the benefit. That is, depending on who was granting the benefit, it was considered exempt or not. Thus, the AEAT admitted the exemption in those benefits granted by regional or local bodies. However, if the same benefit was paid by the National Social Security, no exemption could be applied.

In this sense, the Supreme Court makes a detailed analysis of the reasoning of the Income Tax Law. It concludes that is in  no case apparent that the legislator intended to limit the exemption in this type of benefits. Extending the application of the exemption to maternity benefits received from National Social Security.

In this way, the SC confirms the ruling issued by the Madrid Court of Justice, which ordered the refund of the amount paid by a taxpayer as a maternity benefit charged to National Social Security. Thus establishing new legal doctrine regarding these benefits.

How to recover the taxes paid associated with these benefits?

The AEAT has issued an informative note in which it regulates the application of this new doctrine dictated by the Supreme Court. (AEAT. “Agencia Estatal de Administración Tributaria”/”National Tax Agency”)

In this sense, a time limit is established for taxpayers. Taxpayers may request the rectification of the income tax settlement from 2013 to 2017.

The AEAT has provided a specific form, in order to accelerate the process. It is not necessary for the taxpayer to provide a certificate issued by Social Security with the amount received.

If taxpayers have initiated a correction procedure, they must wait for the competent Court to rule. If they have obtained a resolution, and it is dismissed and final, no refund and/or new review is possible.

For benefits received from 2018 onwards, the AEAT will include the exemption in the tax data offered.

Conclusions

Exempt income is earned income not subject to taxation, as established by the legislator.

Until October 3rd, social security maternity benefits were not considered exempt income. They were taxed at the rates established in the regulations, as an additional income from work.

The Supreme Court has established new doctrine establishing the exemption of these benefits. This exemption was already provided for such benefits when they came from the Autonomous Communities or local authorities.

The AEAT has established a special model for taxpayers to rectify their returns from 2013 to 2017. From 2018, the AEAT will include in the tax data these incomes as exempt.

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