Severance pay by mutual agreement: taxation and reduction for irregular income

The Directorate General of Taxes (DGT) has issued a relevant ruling regarding the tax treatment of amounts received by a worker following the termination of their employment relationship by mutual agreement. This ruling addresses whether these amounts can benefit from exemptions or the reduction for income obtained in a notoriously irregular manner.

What the DGT has ruled

The DGT establishes that the termination of an employment relationship by mutual agreement is considered employment income. Therefore, it is not possible to apply the exemption provided for in Article 7 e) of the Personal Income Tax Law (LIRPF).

Regarding the 30% reduction for income obtained in a notoriously irregular manner, the administration points out that, according to Article 12 of the Tax Regulations, for this benefit to apply, the amounts paid by mutual agreement must be attributed to a single tax period. If the payment is distributed over several tax years, the reduction provided for in Article 18.2 of the LIRPF cannot be applied.

What this means for you

If you are a worker who is going to receive financial compensation for the termination of your contract by mutual agreement, you should take the following points into account:

• Nature of the income: The amount received will be taxed as employment income, with no possibility of exemption.
• 30% reduction: You will only be able to access the reduction for irregular income if the entire severance pay is attributed to a single tax year.
• Risk of distribution: If the payment is fragmented over different years, you will lose the right to apply said reduction.

What is advisable

In a situation of employment termination by mutual agreement, it is necessary to analyze the structure of the payment and the timing of its accrual. It is fundamental to assess whether attributing the amount to a single tax period is beneficial for your tax return. Each particular situation requires a detailed analysis of current regulations to determine the exact tax impact of the operation.