Exemption limits on severance pay for objective dismissal

The Directorate General of Taxes (DGT) has clarified the tax treatment of severance pay received by workers in cases of dismissal for objective reasons. This resolution addresses the application of the exemption in Personal Income Tax (IRPF) when the amount received exceeds the usual limits established by labor regulations.

What the DGT has ruled

The inquiry raised whether severance pay for objective dismissal maintains its tax exemption even if it exceeds 20 days per year of service, provided it does not exceed the amount for unfair dismissal. The DGT has ruled that, in dismissals for objective reasons provided for in Article 52 c) of the Workers' Statute, the IRPF exemption applies up to the amount resulting from the lesser of these two limits:

• The amount mandatory under the Workers' Statute for unfair dismissal, according to the worker's hiring date.
• The amount of 180,000 euros.

Any excess over the limit resulting from this comparison will be taxed as employment income in the beneficiary's IRPF tax return.

What it means for you

For the worker, this implies that receiving severance pay higher than 20 days per year of service does not automatically lead to the loss of the exemption, but it is subject to strict control based on two caps. If the agreed severance pay is very high, it is necessary to calculate precisely which part remains tax-free and which part must be included in the IRPF taxable base.

For companies, this resolution underscores the need to perform an exact calculation of the exempt part and the taxable part when processing the settlement for objective dismissal, avoiding errors in the applicable withholdings.

What should be done

It is essential to verify the hiring date to correctly determine the applicable unfair dismissal amount according to the Workers' Statute. Since the calculation of the exemption depends on the comparison between the legal limit for unfair dismissal and the 180,000 euro cap, it is recommended to assess each particular situation to ensure that the withholding and the subsequent tax return are correct.