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V3586-15 18 November 2015 · SG de Impuestos sobre la Renta de las Personas Físicas Criterion in force
IRPF · indemnización

Severance payments for fixed-term contracts are not exempt from Income Tax

A taxpayer has enquired about the tax treatment of severance payments resulting from the termination of fixed-term contracts. The Directorate General for Taxes (DGT) has ruled that these amounts do not qualify for the redundancy exemption and must be taxed as employment income.

The question raised

The tax treatment to be applied to said compensation, for the purposes of Personal Income Tax, given the discrepancy expressed regarding the withholdings applied to employment income.

The DGT's ruling

The exemption of severance pay or termination payments only applies when the amount is mandatory under the Workers' Statute and the cause is dismissal or termination. In cases of termination due to expiration of time or completion of work or service, although there is a right to compensation, it is not exempt income. Therefore, it is taxed as income from employment. The 40% reduction (or 30% depending on the date) only applies if there is a generation period exceeding two years.

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