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A worker inquired whether their €120,000 compensation for unfair dismissal, recognised through a conciliation body, could benefit from the exemption under Article 7(e) and the reduction under Article 18.2 of the Personal Income Tax Act (LIRPF). The Directorate General of Taxes (DGT) ruled that both benefits can be applied provided legal limits are met.
Question raised: Taxation of severance pay for unfair dismissal: application of the exemption provided for in Article 7 e) and the 40% reduction for irregularity provided for in Article 18.2 a) of the Personal Income Tax Law.
The exemption under Article 7 e) of the LIRPF applies if the unfair dismissal is recognized in a conciliation act (such as before the ORECLA) or a judicial ruling, limited to the amount mandatorily established in the Workers' Statute and subject to a cap of 180,000 euros. The amount exceeding said limit is taxed as employment income, but the 30% reduction under Article 18.2 of the LIRPF may be applied if the seniority exceeds two years and the amount limits provided in the regulation are met.
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