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V2188-18 23 July 2018 · SG de Fiscalidad Internacional Criterion in force
IRNR · rentas del trabajo

Severance payments are subject to Non-Resident Income Tax in Spain if derived from work performed in Spanish territory

The inquiry concerns the tax treatment of severance payments resulting from the termination of employment for employees posted abroad. The Directorate General for Taxes (DGT) rules that these amounts constitute employment income under the OECD Model Tax Convention and will be subject to Non-Resident Income Tax in Spain only if they derive from activities carried out in Spain.

The question raised

Question raised 1. Whether the amounts paid as severance for the termination of an employment relationship would be included among the income under Article 15 of the OECD Model Tax Convention.

The DGT's ruling

Severance payments are generally considered employment income under Article 15 of the OECD Model Tax Convention and must be apportioned proportionally among the countries where the services were rendered. If the employee is a non-resident, Spain may only tax the portion derived from work performed within Spanish territory. However, if the compensation aims to repair damage (such as reputational damage), it could be classified as income under Article 21 of the OECD Model Tax Convention, taxable only in the State of residence. Income exempt under the Non-Resident Income Tax Act shall not be subject to withholding.

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