The exemption of the severance payments for business withdrawal in the personal income tax.
The Personal Income Tax Law establishes the exemption of compensation for dismissal or termination of a contract in the amount established in the Statute of Workers.
The General Directorate of Taxes and the courts have been understanding that this exemption was not applicable in cases of dismissal of senior executives since they considered that these cases there were not minimum compensation because the law admits the possibility of a contrary agreement.
The Supreme Court now concludes, in its Sentence of November 5th, 2019, that the compensation paid to senior executives for the withdrawal of the employer will be exempt to the limited amount of seven days for each year of service with a maximum of six monthly payments. This limit is established in Royal Decree 1382/1985, of August 1st, which regulates the special employment relationship of senior management personnel.
The High Court concludes that such compensation acquires the consideration of regulations for the development of the Workers' Statute and that the compensation of seven days of salary per year worked with the limit of six monthly payments set in the Royal Decree must be considered as a mandatory compensation even in cases of express agreement.
In addition, in said sentence, the Supreme Court indicates that it is necessarily understood that there is the right of compensation in cases of termination of the senior management contract and therefore, the amount of compensation will be exempt from taxation in the Personal Income Tax, up to the limit provided in article 7.e), of the Law of said tax, of 180,000 euros.
On the other hand, it is worth mentioning that recently, several sentences have been issued in which the application of the exemption of the aforementioned compensation is questioned as the qualification of dismissal in the workplace does not automatically imply the application of the tax exemption.
Furthermore, it is worth mentioning other indications for questioning the exemption as can be the acceptance by the employee of a lower amount in some cases, and in others higher than what is established as mandatory in the Workers' Statute.
In other cases, the amounts of the compensation are not related to the seniority of the employee, but to other elements such as the time pending until the retirement of the employee or a supplement to the unemployment benefit.
Another indication that is motivating the disputation of the exemption is the payment of an amount as a concept of a non-competition agreement in order to increase the amounts to perceive by the employee. In this case, the actual risk of competition by people of advanced working age is questioned.
Finally, the questioning of the exemption is also extended to cases in which there are several dismissals, all of which are accepted by the employees without litigation.
In summary, it will be possible to apply the exemption included in the Personal Income Tax Law in case of compensation paid to senior managers, but it is important to bear in mind the indications that are motivating the questioning of said exemptions referred in other cases of severance payments for unfair dismissal, as they will also be applied in cases of compensation to senior managers.
B Law & Tax
International Tax & Legal Advisors.