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V1163-16 22 March 2016 · SG de Impuestos sobre la Renta de las Personas Físicas Criterion in force
IRPF · indemnización

Severance pay for fixed-term contracts is not exempt from Income Tax

A query was raised regarding whether severance pay resulting from the termination of a fixed-term contract for specific projects or services is exempt from Personal Income Tax (IRPF). The Directorate General for Taxes (DGT) ruled that these payments do not qualify for the exemption provided under Article 7(e) of the IRPF Law.

The question raised

Inquiry is made regarding the Personal Income Tax (IRPF) treatment of the severance paid due to the termination of the employment relationship, and the application of the exemption provided for in Article 7 e) of the Personal Income Tax Law. Withholding tax on Personal Income Tax.

The DGT's ruling

The exemption under Article 7 e) LIRPF applies only to severance payments for dismissal or termination mandatorily established by law or regulation. Amounts received due to contract termination by expiration of time or completion of work are not exempt income. These amounts are taxed as employment income subject to withholding. The 40% reduction under Article 18.2 LIRPF applies if the generation period exceeds two years.

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