Workers returning to the company in less than three years lose dismissal exemption

The tax exemption on severance pay for dismissal is a benefit that allows these amounts to be received without being taxed under Personal Income Tax (IRPF). However, the continuity of the employment relationship with the employing entity may invalidate this tax treatment.

What the DGT has ruled

The Dirección General de Tributos (DGT) has analyzed whether a worker's reinstatement at their former company affects the exemption provided for in Article 7 e) of the IRPF Law. The criteria establish that, for the severance pay not to be taxed, there must be a real and effective severance of the worker from the company.

The administration has pointed out that it is presumed that no such severance exists if the worker returns to provide services to the same company or to a related company within three years following the dismissal. This presumption of employment continuity aims to prevent dismissals from being used to obtain tax benefits without a true break occurring with the entity.

What it means for you

If you have received severance pay for dismissal and decide to rejoin the same company or a company within the same economic group in a period of less than three years, the Tax Agency could consider that the severance was not real. In this scenario, the severance pay would cease to be exempt and would instead be taxed as employment income.

It is important to understand that the regulations contemplate not only the direct company but also related companies, which expands the scope of this presumption of continuity.

What should be done

Although the presumption that the severance is not real is strong, the regulations allow for evidence to the contrary. This means that the taxpayer can attempt to prove that the new employment relationship is independent and that the initial severance was, in fact, real and effective. In situations of re-hiring within business groups, it is necessary to assess the nature of the new relationship and the documentation supporting the previous break to avoid tax contingencies.