Severance payments for objective dismissal may be exempt from personal income tax (IRPF), but only up to certain limits. In this article, we explain the tax exemption criteria and the tax implications if these limits are exceeded.
What Does the Law Say About IRPF Exemption?
According to Article 7(e) of the Spanish Income Tax Law (IRPF), severance payments are exempt from taxation if they comply with the amounts established in the Workers' Statute (Estatuto de los Trabajadores, ET). For dismissals due to objective reasons (Article 52.c of the ET), the exemption applies up to a maximum of €180,000.
Exemption Limit Calculation
The exempt amount varies depending on the contract date:
- For contracts signed after February 12, 2012, the exempt severance payment is 33 days per year worked, with a limit of 24 monthly payments.
- For contracts prior to this date, a mixed calculation applies: 45 days per year worked until February 12, 2012, and 33 days per year worked from that date until the termination of the contract.
If the severance payment exceeds these limits, the excess will be subject to taxation as employment income.
Taxation of the Excess
When the severance payment exceeds the exempt limits, the excess will be considered employment income subject to Income Tax (IRPF). However, a 30% reduction may apply if certain conditions are met.
Risks in Case of a Tax Inspection
The Tax Agency may review severance payments to ensure they comply with legal limits. The most common risks are:
- Incorrect Exemptions: If the severance payment is based on agreements not covered by the Workers’ Statute (ET).
- Exceeding the €180,000 Limit: The excess must be declared and taxed.
- Splitting of the Severance Payment: If paid in multiple periods, the 30% reduction is lost.
Tips to Avoid Tax Issues
Verify that the severance payment complies with the limits set by the Workers' Statute (ET).
Correctly declare the excess income if it exceeds €180,000.
Evaluate the application of the 30% reduction.
Properly document the severance payment to avoid issues in case of a tax audit.
