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V1166-16 22 March 2016 · SG de Impuestos sobre la Renta de las Personas Físicas Criterion in force
IRPF · indemnización

Compensation for expiry of fixed-term contracts is not exempt from Income Tax

A worker has enquired whether compensation received upon the completion of a fixed-term contract may be tax-exempt. The DGT has ruled that these payments are subject to tax because they are not classified as dismissal or termination.

The question raised

Tax treatment that, for the purposes of Personal Income Tax, must be applied to said compensation for the termination of a work and service contract. Application of the exemption provided for in Article 7 e) of the Tax Law.

The DGT's ruling

The exemption under Article 7 e) of the Personal Income Tax Law applies only to compensation for dismissal or termination when the amount is mandatory by law. In cases of termination due to expiration of time or completion of the work or service, even if there is a right to compensation, it is not considered exempt income. Therefore, these amounts are taxed as employment income. The 40% reduction under Article 18.2 only applies if the generation period exceeds two years.

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