Tax Treatment of Redundancy Payments for Objective Dismissal

An objective-dismissal severance payment is exempt from personal income tax up to the mandatory amount for unfair dismissal (33 days’ salary per year worked), subject to a €180,000 cap. Any excess is taxed as employment income; the 30% reduction may apply if the requirements are met.

The tax treatment of redundancy payments under Spanish personal income tax (IRPF) has prompted numerous questions and disputes. In the binding ruling discussed here, the Directorate-General for Taxation clarifies whether compensation for an objective dismissal may qualify for tax exemption when it exceeds 20 days’ salary per year worked.

1. Applicable legal and regulatory framework

Article 7(e) of the Personal Income Tax Act (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): exemption up to the mandatory amount applicable to unfair dismissal.
• Unfair dismissal (Article 56.1 of the Workers’ Statute): compensation of 33 days’ salary per year worked, capped at 24 months’ salary.
• Employment contracts entered into before 12 February 2012: two calculation periods apply:
  • 45 days per year of service up to 11 February 2012.
  • 33 days per year from 12 February 2012 onwards.

Maximum exemption: €180,000.

2. What if the payment exceeds the mandatory amount?

If the payment received exceeds the mandatory amount set for unfair dismissal, the excess is taxable as employment income for personal income tax purposes.

3. The 30% reduction for irregular income

Article 18.2 of the Personal Income Tax Act allows a 30% reduction for certain income received irregularly (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. The employee cannot apply the reduction if they have received another similar payment in the previous five years.

4. Conclusion

• Tax exemption: Compensation for objective dismissal is exempt from personal income tax up to the amount applicable to unfair dismissal, subject to a maximum of €180,000.
• Taxable excess: Any amount above that limit is taxed as employment income.
• 30% reduction: It applies only if the taxable compensation meets the requirements for irregular income and the employee has not received a similar payment in the previous five years.