How does your money tax when you win a claim in court?

After a long wait, you get your reward. Your claim was satisfied, and you get your money back. However, you are not the only one to obtain some good news: the Tax Administration wants its part. In this post you can learn about the fiscal obligations you have after winning your case and how you can fulfill them.

We tell you everything you need to know about how the money earned from a lawsuit is taxed

Legal costs

Are you familiar with legal costs? It’s a very important concept, and you have to know what this all means before you go to the court. And yes, these costs must be taxed.

If you don’t know, legal costs are all those expenses associated to the judicial process. Both the plaintiff and defendant have to pay them. This is a short explanation but remember you can always find the FAQ on our page. That’s where you can find information about this and other basic concepts needed to help you defend your rights.

After the trial, you can encounter one of these three situations:

• We lose and we have to pay the legal costs: This includes your own costs, the lawyer and solicitor fees, and costs related to the opposite part.
• We win and the other part has to pay legal costs. Same as before, but in this case, the opposite party has to pay for everything, not you!
• Each part has to pay its own costs because the judge doesn’t tell about how to tackle and manage any of those costs. This happens when the request is half-accepted or when there are some doubts about the case. In this case, each party pays its own costs.

We are covering the first two situations here.

How are legal costs taxed if we lose?

First, we will see what happens if we lose our claim and we have to pay for legal costs.

If this happens, we have to pay from our own pocket all costs, be it legal or not. There are good news too: the legal cost payment is considered as a patrimonial loss in the IRPF. As a result, the tax amount that you need to pay is lower.

The justification is simple: to pay the opposite cost, our heritage suffers a loss similar to the legal costs paid for the other part. That’s why the Tax Administration allows the imposition of patrimonial loss in the tax base, more particularly in the personal income tax.

How the legal costs are taxed when we win?

What happens if our claim has successes and the other part has to pay the legal costs? The exact opposite to what we said above.

In this case, the Tax Administration understands we have a patrimonial win. This means we have to include it in the taxable base when we declare our rent. Due to that, the personal income tax is higher.

You have to respect the required dates when you declare legal cost amounts, even if it’s a win or a loss. You may want to do this during the legal time when the tax requirements are not higher or lower. If there’s no appeal for the sentence, you have to pay!

Judicial compensations, are they taxed?

First, we have to think that these compensations are considered a patrimonial win and they have to become a part of the personal income tax. But, there are some of them are exempted from taxation: 

First, we have to think that these compensations are considered a patrimonial win and they have to become a part of the personal income tax. But, there are some of them are exempted from taxation: 

• The compensations of responsible civil consecutions for personal damages. This can include a traffic accident for example. You will only have to tribute to the excess quote, which is bigger than the scale.
• The compensations of accident policy. They are exempted until the legal scope recognized.
• The compensations for dismissal. They are exempted till 180.000 euros as a maximum limit, although the limit is not applicated if the dismissal is cased by an ERE.

There are some other compensations exempted like personal damages, mental damages or moral damages and the compensations for labour accidents.

Remunerative rights and compensation rights, what are they and how they tribute?

Yes, there are a lot of compensations with associated interest rates, and these are taxable too. The Tax Administration distinguishes remunerative rights and compensation rights. The first one is given for something (for example, it can be related to mortgage). The second ones are designed to repair damage. For example, the delay interests associated with damage.

The remunerative rights are taxed like capital gains, and the compensation rights are seen like patrimonial gain. Even if the interest amount is not significant, remember we have to have them in mind at the time when paying taxes!

We understand it’s a very difficult issue, but we hope this article helped you shed some doubts regarding the topic. If you found this information useful, don’t hesitate to share it with others!