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V1167-16 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 the tax treatment of severance pay resulting from the termination of fixed-term contracts under the Workers' Statute. The Directorate General for Taxes (DGT) has ruled that these payments are not exempt income and must be taxed as employment income.

The question raised

The tax treatment that must be applied to said severance payment for Personal Income Tax purposes.

The DGT's ruling

Severance payments for contract termination due to expiration of time or completion of work are not exempt income, as the exemption under Article 7.e) of the Personal Income Tax Law (LIRPF) requires the cause to be dismissal or cessation. These amounts are taxed as employment income. However, if the temporary contract has lasted more than two years, the 40 percent reduction under Article 18.2 of the LIRPF may be applied.

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