Foreign tax credit in Spanish Personal Income Tax (IRPF): how to calculate income earned abroad

Which income should be considered when applying the foreign tax credit?

The Central Economic-Administrative Tribunal (TEAC) has recently issued a decision on the interpretation of Article 80.1.b of the Spanish Personal Income Tax (IRPF) Law, relating to the deduction for international double taxation, a matter particularly relevant for individuals earning income abroad.

The issue at hand concerned how to determine the “portion of the taxable base taxed abroad”, that is, which amount should be considered in order to correctly apply the deduction: whether the entire amount on which foreign tax was levied should be considered, or only the part of the Spanish taxable base that was actually subject to taxation outside Spain.

The TEAC confirmed that, for the purpose of calculating the deduction, only the portion of the taxable base that was effectively taxed abroad should be taken into account, that is, the net income after applying the relevant deductions and adjustments under Spanish tax regulations. In this way, it avoids applying the deduction to income that would not have been taxed in Spain, preserving the rule’s main purpose: to avoid double taxation without granting additional tax benefits.

To support its decision, the TEAC referred to a previous unification of criteria ruling (26-05-2000, RG 10356/96), which also applies to the current Personal Income Tax Law regulations, establishing that the calculation must be carried out in accordance with Spanish tax regulations, reconstructing the taxable base and integrating and offsetting income under those same rules. 

Furthermore, the Tribunal clarifies that the current interpretation respects the principle of equality, as it applies different criteria depending on the source of the income, ensuring a consistent and uniform application in accordance with the law.

With this decision, the TEAC clarifies the administrative criterion applicable to the deduction for international double taxation.