06 Nov WITHHOLDING TAX RATE APPLICABLE TO SPECIAL SITUATIONS

Last summer the Spanish Government approved the Real Decreto-Ley 9/2015, on the 10 July, on urgent measures to reduce the tax burden on Income Tax’s payers as well as other economic measures.

The withholding tax rate promised by the Government was changed a few months earlier than expected. Originally these changes were expected in the tax year 2016. In the last few years the withholding tax rate was changed several times therefore there has been confusion between professionals when issuing invoices.

The professionals that were applying until now a withholding tax rate of 19% are now generally reduced to 15%. Until the last legislative change the 15% tax rate was reserved to self-employed professionals with a full return of less than 15.000 euros per year. Nowadays the previous limit has disappeared in order be able to apply the new withholding tax rate to all the professionals. Similarly, the new self-employed professionals that during the first three years of activity were applying a withholding tax rate of 9% now is reduced to 7%.

The confusion arises, even among professionals, when somebody is practising an activity and the fees are paid in in a different tax year in which they were earned. Therefore with the large and current tax reforms, what is the withholding tax rate applicable to the case?

In order to make easier the understanding of this issue the following case is an example:

Heirs of a commercial agent negotiate with the company in which the agent worked for a clientele’s compensation (compensation subject to VAT, Income Tax and Inheritance Tax). The negotiation starts and an agreement is settled down, however during that period of time the withholding tax rate changes. What would be the withholding tax rate applicable to the latter agreement? The one of the date the services were performed, on the invoice date or on the payment date?

The answer to the previous cases can be found in the Income Tax Regulation and the binding consultations of the DGT, and is as follows: “As general rule, the withholding obligation would arise at the moment the fees are required or it is paid”. The professional fees do not have any specific rule about the moment the withholding obligation arises, therefore the withholding obligation must be applied at the moment in which the professional fees are required or paid, being irrelevant the moment in which the services were performed (see the previous example) and the time criteria the professional applies to invoice.

Consequently, the withholding tax rate applicable to the previous case and in any other confusing cases that are currently happening, would be the one in force at the time the withholding obligation be born, that is, when the fees are required or paid.

Guillermo Martínez

Attorney