Risk of losing severance pay tax exemption when working for related companies

The Dirección General de Tributos (DGT) has issued a relevant ruling regarding the application of the tax exemption on severance pay. The core of the issue lies in determining whether the worker's severance from the company is real and effective, an indispensable requirement to avoid being taxed on said amount.

What the DGT has ruled

The inquiry analyzes whether a person can maintain the benefit of the exemption provided in Article 7.e) of the Personal Income Tax Law (LIRPF) if, after being dismissed, they are subsequently hired by a company within the same group. The DGT has determined that the exemption requires real and effective severance.

To guarantee this requirement, the Administration establishes a presumption that no severance exists if the worker provides services to the same company or another related company, according to the Corporate Tax Law, within three years following the dismissal. In this scenario, it would be understood that the labor rupture was not definitive, which would affect the right to the exemption.

What this means for you

If you are a worker who has received severance pay and intends to claim the tax exemption, you must be especially careful with your future employment. If, within a period of less than three years, you accept a position in the same company or in an entity that maintains links with it, the Tax Administration will presume that the original severance was not real.

This presumption that the exemption should not apply may result in the obligation to pay tax on the entirety of the severance pay received, along with the resulting tax consequences.

What you should do

It is fundamental to analyze the corporate structure of potential employers before accepting a new employment relationship. If there is a link between the companies, the burden of proof will fall on the taxpayer. To prevent the exemption from being invalidated, it will be necessary to prove that the new employment relationship does not nullify the original severance that gave rise to the severance pay. Given the complexity of the regulations, it is necessary to assess each particular situation to determine the tax impact of new hires.