Refunds under collar clauses are accountable to the tax authorities
Since the Supreme Court judgment of May 9, 2013, there have been many financial institutions that have eliminated “collar clauses” from their mortgage contracts and have refunded the excess interest paid under those clauses (since the date of reference).
In this regard, the tax authorities, through their Informa program and several binding rulings by the Directorate-General of Taxes issued in June of this year, have stated that “the refund by the bank of interest paid on mortgage loans due to the elimination of collar clauses will not entail income or a gain for the taxpayer, given that the payment is merely deemed an application of income.” However, the foregoing is conditional on the “interest not having been deducted by the taxpayer from income from immovable capital or from income from economic activities.” Moreover, “if those amounts had formed part of the base of the tax credit for investment in habitual dwellings taken by the taxpayer, the right to take the tax credit in relation to them will be lost.”
Thus, the refunds of excess interest paid in the past (since May 9, 2013) need not be declared but the personal income tax returns of the following taxpayers will be affected:
1) Those who deducted that interest as expenses when determining their net income from immovable capital in relation to real estate leases.
2) Those who deducted that interest as expenses when determining their net income from economic activities.
3) Those who took the tax credit for principal residence for the amounts paid for their mortgage (including the interest being refunded now), unless the tax credit was not affected because the amount paid already exceeded the established limits.
How should these tax returns be regularized? Unless there is a last-minute change of interpretation, where the tax authorities have suffered economic loss due to a past tax return, the regularization shall be made through supplementary returns, while in cases where the inclusion of those amounts does not give rise to higher taxation, the taxpayer must file a notice of correction of the tax return merely for information purposes.
Additionally, if the financial institution has paid interest at the legal rate in force each year on the amounts incorrectly collected, the tax authorities consider that such interest is compensatory and, as such, is a taxable capital gain to be included in the savings component of taxable income, being taxed at the rate of 19%, 21% or 23% (depending on the amount) in the year in which it has been collected.
Lastly, any expenses incurred by the taxpayer to claim against the financial institution because of the collar clause (lawyer, court procedural representative, court fees), aimed at eliminating or reducing that clause, must be deemed included in the classification of expenses derived from external financing used to acquire the principal residence and, thus, form part of the base of the tax credit for acquisition of the principal residence.
According to the foregoing, if you have benefited from the annulment of the collar clause from May 9, 2013 onwards and, therefore, the bank has refunded certain amounts to you, you should review the impact it may have on your personal income tax returns and perhaps set aside a portion of the amount refunded in case you need to pay some of it back to the tax authorities.
Garrigues’ Tax Department