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Practical manual for Income Tax 2023.

a) Benefits derived from social security systems

Among the benefits derived from social security systems that are considered work income are the following:

• Social Security and Passive Classes

Pensions and passive earnings received from public Social Security regimes and passive classes are considered income from work, regardless of the person who generated the right to receive them. Likewise, other public benefits for situations of disability, retirement, accident, illness, widowhood, or similar constitute employment income.

However benefits received for absolute permanent disability or severe disability, pensions for disability or permanent disability the passive classes regime, provided that the injury or illness completely disables the recipient for any profession or trade, as well as family benefits referred to in letter h) of article 7 of the IRPF .

Attention: Please note that the Minimum Vital Income constitutes a non-contributory benefit of Social Security in accordance with the provisions of article 2.2 of Law 19/2021, of December 20, which regulates it. Therefore, it will be considered work income in the part that exceeds the exemption provided for in article 7.y) of the Personal Income Tax Law .

Law 19/2021, of December 20, which establishes the minimum vital income, replaces, with effect from January 1, 2022, Royal Decree-Law 20/2020, of May 29.

• General compulsory mutual funds for civil servants ( MUFACE , MUGEJU , ISFAS ), orphanages and other similar entities

The benefits received by the beneficiaries of the aforementioned mutual societies, orphanages and other similar entities constitute income from work.

• Pension plans

Work income is the benefits received by the beneficiaries of the pension plans and those received from the pension plans regulated in Directive (EU) 2016/2341 of the European Parliament and of the Council, of December 14, 2016, relating to the activities and supervision of employment pension funds, whatever the contingency covered by them.

In the case of pension plans, the contingencies for which benefits are paid are those provided for in article 8.6 of the consolidated text of the Law regulating Pension Plans and Funds, approved by Royal Legislative Decree 1/2002, of November 29.

These contingencies are:

  1. Retirement:

    To determine the contingency of retirement, the provisions of the corresponding Social Security Regime will apply.

    When it is not possible for a participant to access retirement, the contingency will be deemed to have occurred from the time he or she reaches 65 years of age, at the time when the participant is not exercising or has ceased his or her work or professional activity, and is not contributing towards the retirement contingency for any Social Security Regime. However, the corresponding benefit may be received in advance from the age of 60, under the terms established by regulation.

    In addition, pension plans may provide for the payment of the retirement benefit in the event that the participant, regardless of his or her age, terminates his or her employment relationship and becomes legally unemployed in the following cases:

    • Due to the death, retirement or incapacity of the employer or due to the termination of the legal personality of the contractor (article 49.1.g) of the Revised Text of the Workers' Statute Law).
    • Collective dismissal (Article 51 of the Revised Text of the Workers' Statute Law).
    • Termination of the contract for objective reasons (Article 52 of the Revised Text of the Workers' Statute Law).
    • In the event of bankruptcy (Article 57 of the Revised Text of the Workers' Statute Law).

    In accordance with the above, the early collection of the retirement benefit is legally provided for as a way of receiving the benefit for the contingency of retirement.

  2. Total and permanent incapacity for work in the usual profession or absolute and permanent incapacity for any job, and severe disability , determined in accordance with the corresponding Social Security Regime.

  3. Death of the participant or beneficiary, which may generate the right to widowhood, orphanhood benefits or benefits in favor of other heirs or designated persons .

  4. Severe dependency or great dependency of the participant , regulated in the Law on the promotion of personal autonomy and care for people in situations of dependency.

Its consideration as work income is maintained, regardless of the form of collection of said benefit: income, capital or in mixed form, income and capital.

Amounts received from the disposition of consolidated rights of pension plans in exceptional cases referred to in article 8.8 of the consolidated text of the Law on Regulation of Pension Plans and Funds (in cases of serious illness or long-term unemployment) are also considered to be income from work. These amounts will have the same tax treatment as pension plan benefits.

Considering that the primary purpose of pension plans is to address the contingencies of retirement, disability, death or dependency, as well as the exceptional nature of liquidity situations (serious illness or long-term unemployment), in the event that the benefit could be collected due to the occurrence of a contingency and simultaneously the requirements for the collection of consolidated rights due to an exceptional liquidity situation are met, for tax purposes it must be understood that the benefit is received due to the occurrence of the contingency of retirement, disability, death or dependency.

• Social security mutual societies

The following are considered employment income: benefits received by beneficiaries of insurance contracts taken out with mutual social security societies, regardless of the contingency covered by them (retirement, disability, death, severe or great dependency and unemployment for working members), the contributions of which may have been, at least in part, deductible expenses for determining the net income from economic activities (in this case, the mutual society acts as an alternative system to the special Social Security regime for self-employed workers) or subject to reduction in the taxable base of IRPF (in this case, the mutual society acts as a supplement to the mandatory Social Security system).

Social security mutual societies are insurance entities that provide a voluntary insurance modality complementary to the mandatory Social Security system, whose legal regulation is found in articles 43 and following of Law 20/2015, of July 14, on the regulation, supervision and solvency of insurance and reinsurance entities (BOE of July 15). The name of these entities must necessarily include the indication "Mutual Fund for Social Security". Due to their special fiscal relevance, the following can be highlighted, among others: professional mutual societies established by professional associations and mutual societies that act as an instrument of corporate social security in favour of workers. See also the ninth Additional Provision of the Tax Law.

The requirements that contributions must meet to be considered as deductible expense or as reduction in the tax base are discussed, respectively, in Chapters 7 and 13.

The integration into the tax base of the benefits received from Social Security Mutual Societies must be carried out, depending on the nature of the contingency covered, in accordance with the following criteria:

  1. Retirement or disability benefits

    These benefits are included in the recipient's tax base, as income from work, exclusively to the extent that their amount exceeds the contributions that could not be reduced or decreased in the tax base due to failure to comply with any of the subjective requirements legally provided for this purpose.

    Therefore, the contributions redeemed by the beneficiaries of insurance contracts entered into with social welfare mutual societies when, on the occasion of the regularisation carried out by the tax authorities, such contributions could not at any time be subject to reduction or decrease in the taxable base of the tax, cannot be considered full employment income and, therefore, are not subject to taxation in the Personal Income Tax as employment income.

    In the case of contributions made before 1 January 1999 , when the amount of the contributions that could not be reduced or decreased in the tax base cannot be proven, 75% of the retirement or disability benefits received will be included.

    See in this regard the second transitional provision of the Tax Law.

    Notwithstanding the foregoing, benefits for permanent disability or severe disability received by professionals included in the special Social Security regime for self-employed workers or freelancers, which derive from insurance contracts signed with social security mutual societies that act as alternatives to Social Security regime, are exempt from ##1## IRPF ##1##, provided that they are benefits in situations identical to those provided for absolute permanent disability or severe disability by Social Security.

    See in this regard the exemption for "Benefits for permanent total disability or severe disability received from Social Security or from entities that replace it" in Chapter 2.

  2. Other benefits

    The remaining benefits, including those received in the event of death, are taxed as employment income in their entirety.

  3. Consolidated rights provision

    The early disposal of economic rights of mutual members is possible in the same cases provided for pension plans. Amounts received from the early disposition, in whole or in part, of vested rights are taxed as employment income.

• Corporate social security plans and other collective insurance contracts that implement the pension commitments assumed by companies

It is necessary to distinguish:

  1. Corporate social security plans:

    The benefits received by beneficiaries of company social security plans are in all cases considered to be work income.

    Please note that the early disposal of economic rights of the insured in these cases is possible in the same circumstances provided for pension plans (long-term unemployment or serious illness).

    For more information, the concept and requirements that must be met by corporate social security plans are discussed in Chapter 13.

  2. Collective insurance contracts, other than social security plans, that implement pension commitments assumed by companies.

     Retirement and disability benefits received by beneficiaries of collective insurance contracts, other than company social security plans, which implement pension commitments assumed by companies, in accordance with the terms set forth in the first additional provision of the consolidated text of the Law regulating Pension Plans and Funds, and in its implementing regulations, shall be included as work income in the tax base to the extent that their amount exceeds the contributions imputed for tax purposes and the contributions directly made by the worker.

    Please also note that, in accordance with the first Additional Provision of the consolidated text of the Law on the Regulation of Pension Plans and Funds in the wording given by Law 27/2011, of August 1 (BOE of August 2), collective dependency insurance is accepted, as of January 1, 2013, as insurance contracts suitable for implementing pension commitments assumed by companies. See the point regarding dependency insurance in this same section.

    Regarding the right of redemption in collective insurance contracts that implement pension commitments assumed by companies, see the first Additional Provision of the Personal Income Tax Law .

    The benefits received by the heirs as a result of the death of the insured worker do not constitute personal work income since their receipt is subject to the Inheritance and Gift Tax.

• Insured pension plans

The benefits received by beneficiaries of insured pension plans are in all cases considered to be work income.

The concept and requirements of insured pension plans are discussed in Chapter 13.

• Dependency insurance

The benefits received by beneficiaries of dependency insurance in accordance with the provisions of Law 39/2006, of December 14, on the Promotion of Personal Autonomy and Care for People in Situations of Dependency ( BOE of December 15) are considered to be work income.