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V1165-16 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 for the termination of fixed-term contracts under the Workers' Statute is exempt from Personal Income Tax (IRPF). The Directorate General for Tax Regulations (DGT) has ruled that it is not an exempt income and is taxed as employment income.

The question raised

Tax treatment that, for the purposes of Personal Income Tax, must be applied to said compensation.

The DGT's ruling

The exemption of severance payments or termination payments requires that the cause be dismissal or termination according to labor regulations. In cases of termination due to the expiration of the agreed period or completion of the work, the compensation is not an exempt income. These amounts are taxed as income from employment. The 40 percent reduction is applicable if the contract has a generation period exceeding two years.

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