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V2114-17 10 August 2017 · SG de Impuestos sobre la Renta de las Personas Físicas Criterion in force
IRPF · indemnización por despido

Severance pay for standard employment relationships may be exempt from Income Tax

A taxpayer has enquired whether severance pay resulting from the termination of an ordinary employment relationship (prior to a senior management role) qualifies for the dismissal exemption and the irregularity reduction. The Directorate General for Taxes (DGT) has ruled that the portion relating to the standard employment relationship may be exempt subject to certain limits, and that any excess may be eligible for the 30% reduction.

The question raised

Application of the exemption provided for in Article 7 e) of the Tax Law and the reduction for irregularity provided for in Article 18.2 of said law, to the compensation for the termination of special senior management and ordinary employment relationships.

The DGT's ruling

If the special senior management relationship preceded a suspended ordinary employment relationship, the compensation for unfair dismissal of the ordinary relationship is exempt up to the lesser of: the amount established in the Workers' Statute or 180,000 euros. For the calculation of years of service, seniority in the company is computed, including subrogations. The excess over the exempt limit is taxed as employment income and may qualify for the 30% reduction if the generation period exceeds two years and the amount limits are met.

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