Tax-Exempt Compensation under Personal Income Tax (IRPF): dismissal, Relocation, Modification

Tax-Exempt Income under Article 7 of Law 35/2006 of 28 November on Personal Income Tax

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Written by Josep Conesa

Employment and insolvency lawyer

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Law 35/2006 of 28 November on Personal Income Tax sets out the compensation payments that are exempt from taxation.

• Up to a maximum of €180,000,
• and only where the grounds are economic, technical, organisational, productive, or constitute force majeure,

Article 7(e) sets out the compensation payments exempt from taxation in connection with dismissal or termination of employment by the employee:

• • Compensation payments for dismissal or termination of employment by the employee, up to the amounts established as mandatory:
    • under the Workers' Statute,
    • under its implementing regulations,
    • under the rules governing enforcement of judgments,
    • but not any amount established by virtue of collective agreement, individual agreement, or contract (any contractually agreed compensation is therefore not exempt from taxation).
  • In cases of collective dismissal, the portion of compensation received that does not exceed the mandatory limits set out in the aforementioned Statute for unfair dismissal shall be exempt, provided the dismissal is:
    • carried out in accordance with Article 51 of the Workers' Statute, or
    • based on the grounds set out in Article 52(c) of the aforementioned Statute.

To qualify, attendance at an administrative conciliation hearing is required, before the CMAC or the Mediation, Arbitration and Conciliation Service (SMAC).

Contact our specialists for assistance with calculating your compensation entitlement and representation at the CMAC:

dismissal Lawyer Barcelona

Tax treatment of compensation in cases of substantial changes to working conditions and workplace transfers:

Compensation arising from contract termination under Articles 40 or 41 of the Workers' Statute, that is, where the employee chooses to terminate the contract in response to a workplace transfer or substantial change to working conditions, is subject to tax. 

This is confirmed by binding ruling V0068-20, dated 15 January 2020, on the tax treatment of compensation for workplace transfers, which states that:

"Compensation paid to employees constitutes, for the purposes of Personal Income Tax (Personal Income Tax (IRPF)), employment income, in accordance with Article 17 of Law 35/2006, of 28 November, on Personal Income Tax and partial amendment of the Corporate Income Tax, Non-Resident Income Tax and Wealth Tax Acts (published in the Spanish Official Gazette (BOE) of 29 November), hereinafter the LIRPF.

However, attention should be drawn to the provisions of Section B.2 of Article 9 of the Personal Income Tax Regulations, approved by Royal Decree 439/2007, of 30 March (published in the Spanish Official Gazette (BOE) of 31 March), hereinafter the RIRPF, which provides as follows:

"Exempt from taxation shall be amounts paid to the taxpayer in connection with a workplace transfer to a different municipality, provided that such transfer requires a change of residence and the amounts relate exclusively to travel and subsistence costs incurred by the taxpayer and their family members during the transfer, and to the costs of removing their furniture and personal effects."

Accordingly, of the compensation received in connection with a workplace transfer, only the portion corresponding exclusively to the costs referred to in that provision shall be exempt from tax, a general geographical mobility payment does not qualify for this exemption, and only where the transfer requires a change of residence. Any amount in excess of the exempt portion shall be taxed as employment income.

TREATMENT OF RELOCATION AND MODIFICATION COMPENSATION AS IRREGULAR INCOME (30% REDUCTION):

The same binding ruling establishes that:

"Having established the foregoing, it is necessary to consider whether the 30% reduction provided for in Article 18.2 of the Personal Income Tax Act (LIRPF) applies to the portion of compensation received that may exceed the tax-exempt amount referred to above. In this regard, Article 18.2 provides for the application of the reduction to gross employment income (other than that referred to in Article 17.2.a)) "which has a generation period of more than two years, as well as income classified by regulation as obtained in a notoriously irregular manner over time, where, in both cases, without prejudice to the provisions of the following paragraph, it is attributable to a single tax period.

In the case of income derived from the termination of an employment relationship, whether ordinary or special, the generation period shall be taken to be the number of years of service of the employee. Where such income is received in instalments, the calculation of the generation period must take into account the number of years over which it is spread, on the terms established by regulation. Such income shall not be taken into account for the purposes of the following paragraph.

However, this reduction shall not apply to income with a generation period of more than two years where, within the five tax periods preceding the one in which it becomes due, the taxpayer has obtained other income with a generation period of more than two years to which the reduction provided for in this section has been applied.

The amount of gross income referred to in this section to which the said reduction shall apply may not exceed €300,000 per year.

(…).".

Firstly, as regards the possible existence of a generation period of more than two years, this must be ruled out, since there is no prior period during which the right to receive relocation payments accrues; rather, that right arises solely from the fact of the workplace transfer itself.

Secondly, once the existence of a generation period has been ruled out, the only basis for applying the 30% reduction lies in classifying relocation allowances as one of the types of employment income that, under the regulations, are considered to have been obtained in a notoriously irregular manner over time, a classification set out in Article 12.1 of the Personal Income Tax Regulations (RIRPF).

in accordance with Article 12.1(a) of the RIRPF, for the purposes of applying the reduction provided for in Article 18.2 of the Personal Income Tax Act (LIRPF), amounts paid by the company to employees in connection with a transfer to another workplace, to the extent that they exceed the amounts set out in Article 9 of the RIRPF, are treated as employment income obtained in a notoriously irregular manner over time, where such amounts are allocated to a single tax period.

Accordingly, provided that the allowances paid by the company to employees in connection with a workplace transfer are not exempt from taxation, the 30% reduction shall apply where, as required by the applicable rules, the amounts are allocated to a single tax period.

This is communicated to you with binding effect, in accordance with Article 89(1) of Law 58/2003 of 17 December, the General Taxation Act."