Workers returning to the same company or an affiliated one will lose their dismissal exemption

The tax exemption for severance pay under Personal Income Tax (IRPF) is not an absolute right, but is instead contingent upon the real breakdown of the employment relationship. The Dirección General de Tributos (DGT) has clarified the scenarios in which this severance of ties may be questioned by the Tax Administration.

What the DGT has ruled

The criteria establish that, for severance pay to be exempt according to IRPF regulations, there must be a real and effective severance of ties between the worker and the employing entity. The tax authority introduces a presumption of a temporal nature: if the worker returns to provide services for the same company or for another affiliated company within three years following the dismissal, it will be presumed that the severance was not real.

This presumption that the employment relationship was not effectively broken results in the loss of the tax exemption on the severance pay received. However, the ruling notes that this presumption admits evidence to the contrary, allowing the taxpayer to demonstrate that the new employment relationship does not invalidate the nature of the previous dismissal.

What this means for you

If you have received tax-exempt severance pay, you must take special care with your future employment contracts. Corporate affiliation regulations (LIS) imply that it is not just a matter of returning to the same workplace, but also of joining companies within the same business group.

• Risk period: The critical three-year period following the termination of the contract.
• Scope of affiliation: The exemption is at risk if the new job is with the same entity or an affiliated company.
• Burden of proof: In the event of re-employment, the responsibility lies with the worker to prove that the initial severance was effective.

What should be done

In a situation involving re-employment within a business group in less than three years from a dismissal, it is necessary to analyze the nature of the new employment relationship and the documentation supporting the previous breakdown. Each scenario requires a technical assessment to determine whether the requirements of the IRPF Law are met and to avoid tax contingencies due to the loss of the exemption.