COVID-19: Brief summary of the possible tax effects of 'ERTE' temporary layoff procedures

a. Obligation to file a return

Where a worker is included in a temporary layoff procedure, depending on the length and conditions agreed in the procedure, it may happen that in one calendar year (personal income tax assessment period) they come to have more than one payer: the company and SEPE, the central government public employment service. The Directorate-General for Taxes has already determined, that SEPE is treated as a different payer for these purposes (in resolution V908/2010 of May 6, 2010).
     
A factor to be considered here is that the Personal Income Tax Law determines thresholds below which taxpayers are not required to file returns. Among them, a return does not have to be filed if the taxpayer’s annual salary income is not higher than €22,000, where it is from one payer (or, if there is more than one payer, where the amounts received from the second and remaining payers do not surpass €1,500 in a year).
    
That amount is reduced to €14,000, however, for income from more than one payer, if the sum of the amounts received from the second and remaining payers does not surpass €1,500 in aggregate on a yearly basis. The same limit applies where the payer of the salary income is not required to withhold tax under the personal income tax regulations.

Personal Income Tax Regulations (article 81) define quantitative limits below which the withholding agent does not have to withhold tax. Those figures (in annual amounts) are as follows:

These amounts are increased by €1,200 for unemployment benefits or subsidies.
     
Based on the above, it may happen that, as a result of the temporary layoff procedure, certain workers may come to be required to file returns, either (i) because they will have more than one payer and their annual salary income may be below €22,000 but above €14,000, or (ii) because a portion of that income (the part that will be paid by SEPE or even the whole of the amount that will be paid annually by the company) is below the figure that triggers the obligation to withhold tax.

On top of this, even if the various payers are required to withhold tax, each payer will calculate the withholding rates by reference to their payment only (not those of other payers); this will mean that, when filing their final personal income tax returns, workers will have tax to pay (whereas, in normal circumstances, they would not have tax to pay or they might even be due a tax refund). Any workers wishing to avoid this effect must be aware that the Personal Income Tax Regulations allow them to ask the payer to apply a rate above the required amount (article 88). This involves the following requirements::

• The request must made in writing to payers.
           
  They will be required to reply to any requests submitted to them, at least five days before the pay slips concerned are prepared.
• The requested new withholding rate must be implemented at least until the end of the year, and until it is cancelled in writing or a higher rate is requested in successive years, unless a change of circumstances occurs, determining a higher rate.

b. Maternity tax credit

The maternity tax credit allowed in article 81 of the Personal Income Tax Law (of up to €1,200 for every child under three, which may go up by a further €1,000 where the taxpayer has paid child-minding costs for the child at nurseries or authorized preschool education institutions) is subject to a number of requirements; basically, that the worker must perform employed or self-employed work in respect of which it may be confirmed that they are registered for social security or mutual insurance purposes. The tax credit is calculated proportionately to the number of months in which those requirements are satisfied, and has a limit placed on it, for every child, equal to the social security or mutual insurance contributions and payments due in each tax period following the birth or adoption (with special calculation rules for the increased tax credit).
              
As a result of temporary layoff procedures, as the DGT has confirmed in various resolutions (V1955-13 and V1957-13, both dated June 11, 2013) the right to receive part of the tax credit (or all of it depending on the duration of the temporary layoff procedure) may be forfeited, in that while the temporary layoff procedure is in place the worker is not performing employed or self-employed work. Reasonably, this consequence will not occur in a temporary layoff procedure for reduced hours because, in this case, for the duration of the temporary layoff procedure, the worker will be working (although the tax credit may be reduced by reference to the number of hours worked).

AEAT, the Spanish tax agency, has recently confirmed this interpretation in its FAQ document (question 7 in the section on personal income tax), by explaining that “in cases of suspension of the employment contract for the whole month, as a result of the approval of a temporary layoff procedure, no employed work is performed and the requirements for claiming the maternity tax credit and the relevant advance payment are no longer met. It would only be possible to perform employed work where it is performed on a part-time basis in cases of temporary layoff procedures for reduced hours. In these cases, the worker will be entitled to receive the maternity tax credit in respect of those months”. The FAQ document may be viewed here.