Severance pay by mutual agreement: no exemption or reduction for irregularity

The Directorate General of Taxes (DGT) has issued a relevant ruling regarding the tax nature of amounts received by workers following the termination of their employment contract by mutual agreement. This pronouncement delimits the treatment of these payments in Personal Income Tax (IRPF).

What the DGT has ruled

The inquiry focused on determining whether a severance payment received monthly over a period of 4.8 years could be considered income obtained in a notoriously irregular manner. The DGT has ruled that:

• Nature of the income: Severance pay for termination by mutual agreement is considered employment income.
• Absence of exemption: It does not enjoy the exemption provided for in Article 7 e) of the IRPF Law.
• Impossibility of reduction: Although the Regulations consider these amounts as irregular income, the 30% reduction established in Article 18.2 of the LIRPF is only applicable if the amounts are imputed to a single tax period. As they are received monthly over several years, this legal requirement is not met.

What this means for you

If you are a worker who has accepted an exit from the company through an incentivized redundancy plan or a mutual agreement that involves periodic payments, you must take into account that this income will be taxed in full. Since it does not meet the requirement of being received in a single tax year, you will not be able to apply the 30% reduction for irregularity, which will increase the tax burden on these amounts. This scenario is common in exit plans where the company structures the severance pay in monthly installments over a prolonged period.

What you should do

It is necessary to analyze the structure of the payments agreed upon in the employment termination agreement. Since the regulations require imputation in a single period to access tax benefits, the way the amounts are distributed over time will determine the final impact on the tax return. It is recommended to assess the particular situation and the composition of the payments before formalizing agreements of this nature.