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V1514-15 20 May 2015 · SG de Impuestos sobre la Renta de las Personas Físicas Criterion in force
IRPF · indemnización por despido

Compensation for unfair dismissal is exempt within the limits of the Workers' Statute and subject to a cap of 180,000 euros

A worker enquired whether their compensation for unfair dismissal following a company merger was exempt from tax or eligible for a reduction. The Directorate General for Taxes (DGT) clarified that the tax exemption is capped at 180,000 euros and that, when calculating seniority, the period worked at the absorbed company must be taken into account.

The question raised

Given the modifications introduced to the Personal Income Tax Law by Law 26/2014: whether the compensation received is considered exempt and, in the event that it is taxable, whether the reduction provided for in Article 18.2 of the Tax Law is applicable.

The DGT's ruling

Compensation for unfair dismissal is exempt up to the limits established by the Workers' Statute and, in any case, subject to a cap of 180,000 euros. Any amount exceeding these limits is taxed as income from employment. In cases of business succession, the calculation of years of service to determine the compensation must include the time worked at the previous company. The excess compensation may qualify for the 40% reduction provided in Article 18.2 of the Personal Income Tax Law (LIRPF) if received as a lump sum and the generation period exceeds two years, subject to an annual limit of 300,000 euros.

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