30% Reduction on Severance Pay for Termination of Employment: DGT Criteria

The General Directorate of Taxes (DGT) has issued a relevant ruling regarding the application of the reduction provided for in Article 18.2 of the Personal Income Tax Law (Ley del IRPF) to severance pay received due to the termination of an employment relationship. This pronouncement clarifies how the income should be treated for tax purposes depending on whether the departure from the company occurs due to dismissal or mutual agreement.

What the DGT has ruled

The advisory body establishes that the tax treatment varies according to the nature of the termination:

• Due to dismissal: The 30% reduction can be applied as long as the generation period (the years of service that give rise to the severance pay) is greater than two years and the amount is imputed to a single tax period.
• By mutual agreement: The severance pay is considered notoriously irregular income. In this case, it is also possible to apply the reduction if the income is imputed to a single tax period.

Furthermore, the DGT confirms that applying this reduction is possible even if the taxpayer has already used the reduction for income with a generation period of more than two years in previous tax years.

What this means for you

If you are a worker who is going to receive severance pay in the next tax year, it is fundamental to correctly identify the cause of your contract termination. The regulations allow for the optimization of the tax burden through the 30% reduction, but require compliance with specific requirements regarding timing and imputation. The fact that you have used similar benefits in the past does not prevent you from accessing this reduction in your current situation of employment termination.

What you should do

In a situation involving the termination of an employment relationship, it is necessary to analyze the legal nature of the severance pay to be received. You should verify whether the origin is a dismissal or a mutual agreement to determine the method for applying the reduction. Since correct imputation in the tax period is a key requirement, it is necessary to assess your particular situation to ensure that the applied tax treatment is correct according to the LIRPF and the RIRPF.