The General Directorate of Taxes (DGT) has clarified that the compensation of 1,800 euros paid by Social Security to men who had to claim the child supplement in court must be included in personal income tax. The Treasury understands that this payment does not cover personal injury, but rather the economic damage derived from the judicial process, so it is not exempt from taxation. The difference is that litigation expenses, such as attorney or costs, can be deducted and reduce the tax impact.
The reason why the Treasury treats it as taxable income is quite technical, but relevant. Some compensations are exempt from personal income tax, especially those linked to personal injuries. Here, however, the criterion is different, since the compensation of 1,800 euros is understood as reparation for economic damages, that is, the cost of having had to sue to collect the supplement. And that puts it outside the usual exemptions.
The important part for many affected people is not so much in what they pay, but in how they pay. The Central Economic-Administrative Court established in 2020 that, when a taxpayer receives legal costs, they can subtract the expenses incurred in the lawsuit up to the limit of what was received. If the compensation only covers those costs, there is no real capital gain. That criterion was not born for this supplement, but it fits quite precisely into this debate and explains why many pensioners might not end up paying for the full 1,800 euros.
Therein lies the true value of this clarification. The easy headline is that “compensation is taxed”, but the useful reading for the affected person is another: if there was a lawyer, solicitor or costs and those amounts are well justified, the tax bill can be greatly reduced. It is not a minor detail, because the Supreme Court itself justified this compensation precisely as a way to compensate for the damages suffered by having to complain before the courts.
There is also another nuance and that is that the Tax Agency allows you to deduct, in general, up to 300 euros per year for legal defense expenses from work income. But if those same expenses are used to reduce the capital gain associated with the compensation, it is reasonable not to use them twice.