Rehiring after dismissal: the impact on severance pay exemption
The Dirección General de Tributos (DGT) has clarified the tax treatment of severance pay when a worker is rehired by the same entity or a related company within a short period. This scenario raises doubts about whether the labor rupture was truly effective for the purposes of the Personal Income Tax (IRPF) exemption.
What the DGT has ruled
The binding ruling determines that if a worker provides services to the same company, or a related one, within three years following their dismissal, a presumption is created that no real and effective severance occurred. The objective of this presumption is to verify whether the severance pay paid meets the requirements of Article 7 e) of the IRPF Law.
However, the DGT clarifies that this presumption admits evidence to the contrary. That is, the taxpayer can provide evidence demonstrating that the severance was indeed real and that the new employment relationship does not nullify the nature of the previous one. In the event that the severance pay is not exempt for this reason, but the period of generation of the earnings exceeds two years, the 30% reduction provided for in Article 18.2 of the LIRPF may be applied.
What it means for you
If you are a worker who has received severance pay and, shortly thereafter, is hired again by the same company or by a company within the same group, you should be cautious regarding the tax treatment of that income. The Tax Administration could consider the severance pay not exempt if it understands that the employment relationship was never effectively broken.
What you should do
In a situation of rehiring within a period of less than three years, it is necessary to analyze the nature of the previous rupture. If you intend to apply the exemption for the severance pay, it is fundamental to have documentation that accredits the existence of a real severance. In the event that the exemption is not applicable, you must verify whether the requirements for the 30% reduction on employment income are met.
Frequently asked questions
- Can the severance pay lose its exemption if I am rehired?
- Yes, unless it can be demonstrated that the severance was real and effective through evidence to the contrary.
- What happens if the severance pay is not exempt but the generation period is long?
- The 30% reduction established in Article 18.2 of the LIRPF could be applied if the period exceeds two years.