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A local council acknowledges the illegality of a dismissal during judicial conciliation and agrees to pay 18,750 euros in compensation. The tax treatment under IRPF and the obligation to withhold tax are examined. The DGT applies the exemption under article 7.e) of the IRPF law up to the statutory amount required by the Workers' Statute.
Question posed: Tax treatment of compensation for unfair dismissal.
Compensation for unfair dismissal is exempt from Personal Income Tax (IRPF) in accordance with Article 7.e) of the LIRPF, up to the amount mandatorily established in the Workers' Statute (33 days per year of service up to 24 monthly payments for contracts entered into after February 12, 2012; transitional regime for prior contracts), subject to an absolute limit of 180,000 euros. The excess over said mandatory amount is taxed as employment income, and the 30% reduction provided for in Article 18.2 of the LIRPF may be applied if the generation period exceeds two years. There is no obligation to withhold tax on the exempt portion; withholding is only applied to the amount that is subject to tax and not exempt.
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