Risk of losing severance pay tax exemption upon rejoining a company
The tax exemption on severance pay is a significant benefit for workers, but its application requires strict compliance with certain severance requirements. A recent binding ruling from the Dirección General de Tributos (DGT) has clarified the consequences of resuming an employment relationship with the same company or an affiliated group within a short period.
What the DGT has ruled
The DGT has indicated that, for severance pay to be exempt from taxation according to the Personal Income Tax Law (LIRPF), there must be a real and effective severance of the worker from the employing entity. The body establishes a presumption that such severance has not occurred if the worker returns to provide services for the same company or for an affiliated entity within the three years following the dismissal.
This presumption implies that the Administration could consider that the labor rupture was not definitive, which would affect the tax treatment of the severance pay received. However, the ruling clarifies that this presumption admits evidence to the contrary, allowing the taxpayer to demonstrate that the new employment relationship does not nullify the original severance.
What this means for you
If you have received severance pay and plan to work again for the same company or a company within the same economic group in less than three years, you should be aware that your tax exemption could be compromised. The risk lies in the tax authority interpreting that the employment relationship was never effectively interrupted, which would require including the severance pay in the IRPF taxable base.
What you should do
In this situation, it is essential to analyze the nature of the new hiring and the structure of the business group. Should a rejoining occur before the three-year period, it will be necessary to have means of proof that certify the initial severance was real and that the new employment relationship is independent of the previous one. It is recommended to assess each particular situation to determine the feasibility of maintaining the tax benefit.
Frequently asked questions
- What happens if I return to work for a company in the same group before three years?
- There is a presumption that there was no real severance, which could invalidate the tax exemption on the severance pay received.
- Can the Administration's application of this presumption be avoided?
- Yes, the regulations allow for the provision of evidence to the contrary to demonstrate that the new employment relationship does not nullify the original severance.