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V3297-20 6 November 2020 · SG de Impuestos sobre la Renta de las Personas Físicas Criterion in force
IRPF · indemnización por despido

Rehiring an employee within three years may void dismissal compensation tax exemption

A company sought clarification on whether rehiring an employee dismissed in 2018, which occurred in 2020, affected the tax exemption of their severance pay. The Directorate-General for Taxes (DGT) indicates that rehiring within three years creates a presumption that no real termination of the employment relationship took place, which could require the worker to pay tax on said compensation.

The question raised

Tax treatment under Personal Income Tax (IRPF) regarding severance pay in the scenario presented. Obligations of the company. Withholdings on account of Personal Income Tax (IRPF).

The DGT's ruling

The exemption of severance pay requires a real and effective termination of the employment relationship. If the employee provides services again to the same company or to a related entity within the following three years, it is presumed that there was no effective termination, unless proven otherwise. If the termination is not substantiated, the worker must include the severance pay in their Personal Income Tax (IRPF) return. It is not appropriate to apply withholding tax on the severance pay if, at the time of payment, it is not known that there was no termination.

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