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On 5 July 2013, the Spanish Government appointed an Expert Commission to examine a possible tax reform. That Commission has now completed its report, which is due to be debated in the Spanish Parliament (Cortes Generales) this June.
The report, available at www.minhap.gob.es, pages 99–100, reaches the following conclusions:
First, the Commission concludes that compensation payments for dismissals on objective grounds, that is, on economic, technical, organisational or production-related grounds, "should not be exempt from Personal Income Tax (IRPF)", on the basis that the loss of employment for such reasons "falls within what must necessarily be anticipated when an employment contract is entered into".
Second, with regard to disciplinary dismissal, the Commission concludes that "a significant proportion of these dismissal cases are taken to litigation so that dismissals arising from other causes, including voluntary agreements between the employer and the employee, obtain a finding of unfairness, thereby securing the corresponding tax exemption at the expense of the public Spanish Tax Authority". It therefore recommends that "this exemption should be abolished, as doing so would substantially reduce employment litigation".
Given the current parliamentary majorities, even if these conclusions are debated, the ultimate decision will rest with the Government. Should this Expert Commission recommendation be adopted without modification, it could mean that the full amount of any dismissal compensation would be subject to Personal Income Tax (IRPF) at the applicable rate. In Catalonia, for example, the effective tax rate on such compensation could reach as high as 51%.
