B Law & Tax
30 June 2023

Tax advisor: Termination of a senior management contract due to significant changes in working conditions

In situations where a special senior management employment relationship is terminated, case law has established that it is possible to apply the personal income tax (IRPF) exemption to the severance payment received by the senior manager. Therefore, the exemption has been recognized both in cases of termination of the senior management contract due to the decision of the employer and in situations of unjustified dismissal of the senior manager.

In the case of the employer’s termination, the Supreme Court justifies the tax exemption on the basis that the regulations governing the senior management contract recognize the right to receive a mandatory minimum indemnity of 7 days’ salary for each year of employment, with a limit of six monthly payments (according to article 11 of Royal Decree 1382/1985). This amount is exempt from income tax. On the other hand, the National Court, using the same reasoning, has considered that the amount equivalent to 20 days’ salary for each year worked in cases of unfair dismissal is also exempt from taxation, since this is expressly established in the aforementioned article.

In the case of termination of the employment contract due to a substantial modification of the working conditions that adversely affect the professional training of the employee or undermine his dignity, this cause for termination of the contract is considered to be contemplated within those regulated in Article 12 of Royal Decree 1382/1985. Said article establishes that, except for the particularities set forth in the previous articles of said Royal Decree, the special senior management employment relationship may be terminated for the causes and through the procedures set forth in the Workers’ Statute. Therefore, the cause for termination of common labor contracts due to substantial modification of the conditions must also be considered a cause for termination of the senior management contract.

However, in this scenario and in relation to the possible exempt amount of the indemnity for the termination of the employment contract due to this cause, Article 12 of Royal Decree 1382/1985 does not establish any specific amount for the indemnity, neither minimum nor maximum, nor as an alternative to what has been agreed between the parties. Therefore, since no minimum indemnity is established for the termination of the senior management contract due to a substantial modification of the working conditions, no IRPF exemption can be considered in these cases.

B Law & Tax International Tax & Legal Advisors.

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