Exemption on severance pay for objective dismissal up to the unfair dismissal limit

The Directorate General of Taxes (DGT) has issued a relevant ruling regarding the tax treatment of severance pay received by workers in situations of dismissal due to objective causes. The central issue lies in determining whether it is possible to apply the exemption provided for in the Personal Income Tax (IRPF) regulations when the amount of the severance pay exceeds the usual amounts for an objective dismissal.

What the DGT has ruled

The query concerned whether the additional amount of severance pay for an objective dismissal could be exempt if it does not exceed the limits mandatorily established in the Workers' Statute for unfair dismissal, with a maximum cap of 180,000 euros.

The DGT has ruled that, in dismissals for objective causes, the exempt part of the severance pay is that which does not exceed the limits set by the Workers' Statute for unfair dismissal. Therefore, even if the agreed severance pay is higher than 20 days per year of service, the exemption can be applied until those legal limits are reached, provided the 180,000 euro maximum is not exceeded.

What this means for you

This ruling has a direct impact on workers receiving severance pay for objective dismissal. It means that not all the amount received must necessarily be taxed as employment income. If the severance pay remains within the margins established by law for unfair dismissal, that portion will not be subject to IRPF.

However, any excess over those legal limits will be taxed as employment income. In this case, the excess could benefit from the 30 percent reduction if the period during which said income was generated is greater than two years, provided that the specific limits according to the amount received are respected.

What should be done

For companies, this ruling implies the need to perform a precise calculation of the exempt and taxable portions of the severance pay at the time of payment. For workers, it is essential to verify that the calculation of the exemption complies with the limits of the Workers' Statute to avoid errors in their income tax return. Since every contractual situation is different, it is necessary to assess each particular case to correctly apply the current regulations.