Severance payments by mutual agreement do not qualify for the exemption for work performed abroad

The nature of the amounts received following the termination of an employment relationship is decisive for their tax treatment. Not all income obtained by a worker who has provided services outside of Spain can benefit from tax incentives intended for international mobility.

What the DGT has ruled

The Dirección General de Tributos (DGT) has analyzed whether income received following termination of employment, corresponding to the period in which the taxpayer performed work for subsidiaries abroad, can qualify for the exemption provided in Article 7 p) of the Personal Income Tax Law (LIRPF).

The Administration's criteria establish that the aforementioned exemption applies exclusively to remuneration that specifically corresponds to the performance of work abroad. In this case, as it involves economic compensation derived from the resolution of the contract by mutual agreement, the amount does not constitute income derived directly from the provision of services abroad, but rather severance pay for the termination of the employment relationship.

What this means for you

If you are a professional who has worked for subsidiaries of a group abroad and subsequently terminate your employment relationship through a termination agreement, you must take into account that the severance pay received will be taxed ordinarily.

Even if the work period was international, the concept of the income is what determines its taxation. The exemption for work performed abroad cannot be extended to concepts caused by the breach of contract, as these do not have the nature of income for services rendered abroad, but rather compensation for the termination of the employment relationship.

What you should do

It is necessary to analyze the composition of any exit package or severance pay to correctly identify the nature of each economic concept. The correct distinction between what is remuneration for services and what is severance pay for contractual resolution is fundamental to avoid errors in the IRPF tax return and possible requests from the Administration. Each termination situation must be assessed individually to determine the applicable tax treatment according to current regulations.