Since December 2002, following an amendment introduced by the then PP government, legislation had permitted what became known as 'express dismissal', that is, a dismissal in which the company acknowledged that the dismissal was unfair and paid or deposited the compensation with the court on behalf of the employee.
Written by Josep Conesa
Employment and insolvency lawyer
This mechanism allowed an employer to dismiss an employee whilst acknowledging that the dismissal was unfair, with the aim of avoiding liability for interim wages. Interim wages (salarios de tramitación) are the wages that the employee ceases to receive from the date of dismissal until a ruling is issued declaring the dismissal unfair or null and void.
Following that amendment, if the employer met certain formal and timing requirements, namely, depositing the compensation amount (calculated at 45 days' salary per year worked) within 48 hours of the dismissal, the employer was released from any liability for interim wages, unless the dismissal was challenged and declared null and void by a court.
In parallel, Personal Income Tax (IRPF) legislation recognises a tax exemption for compensation payments in dismissal cases, provided the agreed amount does not exceed the sum that would have been payable in the event of unfair dismissal.
The latest labour reform came into force on 12 February. The new legislation has abolished interim wages (except in cases where a judge declares the dismissal null and void) and, as a consequence, the legislator took the view that there was no longer any reason to maintain the option of 'express dismissal' with the company's acknowledgement of unfairness, since its primary purpose, namely giving the company a means of stopping interim wages from accruing, had already been addressed by other means.
This gives rise to the following key question:
Is the tax exemption available only where the dismissal is declared unfair by a judge or recorded in a conciliation settlement? Or does it also apply to compensation agreed before any conciliation hearing takes place?
Spanish Tax Authority may take the view that the exemption only applies where a judge or conciliation lawyer formally declares the dismissal unfair. However, our legal opinion is that the Personal Income Tax Act states that 'compensation for dismissal shall be exempt provided it does not exceed the amount that would have applied had the dismissal been declared unfair', and therefore, since the labour reform did not amend this provision of the Personal Income Tax (IRPF) legislation, we consider that nothing has changed with regard to the exemption of severance compensation.
In any event, in order to avoid protracted litigation before the administrative courts over whether the exemption applies, to minimise the risk of surcharges, and because our duty is to offer prudent advice, until this matter is legally clarified or a binding ruling is issued by Spanish Tax Authority, we recommend attending a conciliation hearing so that the unfair nature of the dismissal is formally recorded, thereby securing the tax-free treatment of the compensation.
As clarification on this point is still pending, we will keep you informed of any developments in future publications.
