Tax Treatment of Compensation for Objective Dismissal in Spain

Tax treatment of compensation for objective dismissal: IRPF exemption and statutory limits

The tax treatment of dismissal compensation under Spanish Personal Income Tax (IRPF) has been the subject of many questions and disputes. In the binding ruling discussed here, the Directorate-General for Taxes (DGT) clarifies whether compensation for objective dismissal can qualify for tax exemption when it exceeds 20 days’ salary per year of service.

1. Applicable legal framework

Article 7(e) of Personal Income Tax Law 35/2006 provides that compensation for dismissal or termination is exempt when it does not exceed the mandatory amounts set by the Workers’ Statute. In particular:

• Objective dismissals for economic, technical, organisational or production reasons (Article 52(c) of the Workers’ Statute): exempt up to the mandatory amount for unfair dismissal.

• Unfair dismissal (Article 56(1)): compensation of 33 days’ salary per year of service, capped at 24 months’ salary.

• Contracts entered into before 12 February 2012: two rates apply: 45 days per year of service up to 11 February 2012, and 33 days per year from 12 February 2012 onwards.

The maximum exemption is €180,000.

2. What if compensation exceeds the statutory amount?

If the compensation received exceeds the mandatory amount set for unfair dismissal, the excess is taxable as employment income for IRPF purposes.

3. The 30% reduction for irregular income

Article 18(2) of the Personal Income Tax Law allows a 30% reduction for certain irregular income generated over more than two years or classified as exceptionally irregular.

In short:

• If the compensation is taxable as employment income, the 30% reduction may apply if the statutory requirements are met.

• The reduction cannot be claimed if the employee has received similar compensation in the previous five years.

4. Conclusion

• Tax exemption: compensation for objective dismissal is exempt from IRPF up to the unfair-dismissal limit, subject to a maximum of €180,000.

• Excess amount: any amount above that limit is taxable as employment income.

• 30% reduction: available only where taxable compensation meets the requirements for irregular income and the employee has not received similar compensation in the previous five years.