BackWhen it is time to file the Personal Income Tax return, taxpayers often do not know if they have to pay taxes on severance payments received in the last year. This will vary depending on the taxpayer’s case.
The Personal Income Tax Act regulates the taxation of severance payments in its article 7, which establishes that since July 2012 these amounts are exempt from taxation provided that they have been recognized in a conciliation act or a judicial resolution. However, there is a limit of 180,000 euros for not declaring them.
If the limit of 180,000 euros for severance payments is exceeded, the surplus will be considered as income from work subject to taxation, although the legally established reduction for income from work generated over a period of more than two years may be applied. However, this limit will not apply in the following cases: for severance payments for dismissals or terminations prior to August 1st, 2014; and for severance payments for dismissals occurring after that date if they come from an approved employment regulation plan or a collective dismissal in which the opening of the consultation period has been reported to the labor authority prior to August 1st, 2014.
On the contrary, there are certain severance payments that are subject to tax, such as those established by virtue of an agreement, pact or contract. In addition, in general, the amounts received as a consequence of the termination of the employment contract for any cause other than the dismissal or termination of the employee, or for which the employee’s right to receive compensation is not established in a mandatory manner in the Workers’ Statute or in its development rules, are also subject to tax payment. Among the cases in which severance payments are subject to tax, the following can be included: the termination of temporary or fixed-term employment contracts; disciplinary dismissals considered to be justified; the termination of the employment contract by decision of the employee (termination), provided that it is not justified by any of the causes contemplated in articles 41.3 and 50 of the Workers’ Statute.
It is important to differentiate between the severance payment and the settlement. The severance payment is paid whenever an employment relationship is terminated, regardless of the cause, and usually includes the outstanding salary, vacations not taken, unpaid incentives and a proportional part of the extraordinary payments. Unlike severance pay, the severance payment is always subject to taxation as employment income in the Personal Income Tax return.
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