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For some years now tax auditors have been reviewing the severance paid by companies to their workers and in particular eligibility for the exemption under article 7.e) of the Personal Income Tax Law. The issues examined in these cases are the legal characterization of the dismissal or whether unilateral termination by the employer actually existed, or whether instead there was an agreement between the parties. In this context, the tax authorities have been attaching less importance to whether employment law procedures have been strictly followed or to the fact that conciliation is an inescapable procedure in employment matters.

Along these lines, the Central Economic-Administrative Tribunal, in a recent decision on July, 2019 (R.G. 3934/2017), underlined that this characterization for tax purposes of dismissals by tax auditors falls within their powers and affirmed that:

1. tax auditors have the power to examine the real legal nature of a dismissal, in view of its tax implications, according to article 13 of the General Taxation Law.
2. As the tribunal has found on repeated occasions, a prior conciliation agreement reached at the Mediation, Arbitration and Conciliation Service (SMAC) between employer and employee over the unjustified nature of the dismissal, determining the amount of severance, is not an impediment to the tax auditors being able to conclude that the exemption is unjustified without having to prove the existence of simulation.

In the examined case, the tribunal held it reasonable that the auditors had concluded that a number of terminations resulted from a mutual agreement, based on items of evidence related to (i) the employees’ ages (close to retirement), (ii) the amount paid (in some cases higher and others lower than that set out in the Workers’ Statute), (iii) no support for the disciplinary reasons behind the termination decision, etc. Importantly, the National Appellate Court reached a similar conclusion in a recent judgment on July 3, 2019 (appeal 144/2017).

Although the fact of using a few of these circumstances as evidence of mutual agreement is surprising to say the least (the Personal Income Tax Law itself accepts that employers may pay sums higher than the amount determined in the Workers’ Statute in the provisions on a reduction for multiyear income on non-exempt amounts), this conclusion compels particular attention to be paid to evidencing the grounds for dismissals, because in this context proof of the facts is a fundamental requirement.

In the same decision, TEAC also examined the exemption for work actually performed abroad (article 7 p) of the Personal Income Tax Law) and concluded (very questionably) that it can only be claimed for salary income strictly speaking, in other words, it cannot be claimed where the relationship between taxable person and employer is not an employment or public worker relationship.