Controversial issues arising from income tax returns: main areas of scrutiny

In the coming weeks, news about the start of the 2025 income tax campaign will begin to proliferate on social media, in the general press and even in the sports press.

In light of this, we would like to review some of the issues that most frequently generate conflict between taxpayers and the tax authorities after the income tax return has been filed.

1. Application for the exemption of work completed abroad (Art. 7p. LIRPF)

Article 7 p. of the Income Tax Law regulates an exemption applicable to income from work performed abroad, provided that certain requirements are fulfilled, including that the services are provided for the benefit of a non-resident entity.

In practice, companies rarely apply this exemption directly to payroll. As a result, taxpayers declare income from work that is lower than that reported by the company on the form 190, which generates discrepancies that usually give rise to verification procedures by the Administration.

2. Irregular income and application of the 30% reduction

Income generated over a period of more than two years that is attributed to a single tax period, as well as income that is classified by regulation as having been obtained in a notoriously irregular manner over time (e.g. amounts obtained from the transfer or assignment of a business premises agreement), may benefit from a 30% reduction provided for in the personal income tax regulations.

The application of this reduction, limited to a net income amount not exceeding €300,000, is usually subject to review by the tax authorities who analyse compliance with the requirements, including recurrence.

3. Income from real estate and deductibility of expenses

To calculate the net income from rental income, all expenses necessary to obtain the income will be deductible.

Among the aspects that are most frequently checked are:

Repair and maintenance expenses when the provider’s tax identification number is not included in the application in the tax return.
The correct allocation of expenses when the property has not been rented for the whole year.
Documentary justification of all expenses, including depreciation, especially when the property has been obtained through inheritance or donation.

4. Income from economic activities and deductibility of expenses

The personal income tax regulations refer to the corporate income tax regulations with regard to the deductibility of expenses. For an expense to be tax deductible, it must be related to income, linked to the activity and duly justified.

The tax authorities repeatedly question certain expenses incurred by self-employed individuals and professionals, especially those relating to travel, hotels, vehicles, supplies or mixed expenses with a potential personal element.

5. Joint custody and minimum allowance for descendants

In cases of joint custody, the application of the minimum allowance for descendants may trigger the initiation of a verification procedure.

The minimum allowance for descendants must be apportioned equally between both parents, regardless of whether the children have been taxed jointly with one of the two parents. Incorrect application of this criterion is a common source of adjustments.

6. Deductions for international double taxation

Double taxation agreements determine which State has the power to tax a particular income. In certain cases, income may be subject to taxation in two countries, and it is up to the State of residence to eliminate any double taxation that may have occurred.

As for the Personal Income Tax Law, it states that when the taxpayer’s income includes capital gains or income obtained and taxed abroad, the lesser of the following amounts shall be deducted:

The actual amount paid abroad for a tax of an identical or similar nature to personal income tax or non-resident personal income tax, or
b) The result of applying the average effective tax rate to the portion of the taxable base taxed abroad.

In practice, the tax authorities usually require proof of the tax paid abroad and details of the basis on which the tax has been applied.

7. Application of the special regime for mergers, demergers, exchanges of securities and non-monetary contributions.

The Corporation Tax Law regulates a special regime under which income derived from the transfer of shares will not be included in the taxable base of personal income tax payers, provided that certain requirements are fulfilled, including, among others, that there are valid economic reasons such as the restructuring or streamlining of the activities of the entities participating in the operation.

Although the income does not have to be included, there is an obligation to report it in the income tax return; Form 100 includes an Appendix in which these transactions, which have been the subject of much debate in recent years, must be itemised.

8. Bonus track: regional deductions in personal income tax

The autonomous communities have the power to regulate deductions specific to their territory, and in certain cases, their application involves receiving a request for information to verify compliance with the requirements for applying the deduction in question.

Conclusion: anticipate verification procedures

Experience shows that many of these issues lead to verification procedures. We recommend anticipating the start of any verification procedures so that you are prepared and can defend the application of the regulations in the best possible way.