Minimum severance payment for termination of a senior manager's employment is also exempt
Spain Tax Alert
Supreme Court has concluded in a judgment on November 5, 2019 (appeal 2727/2017) that severance paid to senior managers for termination of their employment by unilateral decision of the employer at seven days per year of service with a limit of seven monthly payments is exempt.
The Personal Income Tax Law allows an exemption for severance payments stemming from dismissal or termination of employment at the amount established as mandatory by the Workers’ Statute, in its implementing legislation or, where applicable, in the legislation on the enforcement of judgments, although the severance payments allowed in collective labor agreements, agreements with employers or employment contracts may not be considered mandatory. The view traditionally taken by the Directorate General for Taxes and the courts is that this exemption does not apply to terminations of senior managers’ employment, because the payments equal to seven days per year (with a limit of six monthly payments) or twenty days a year (with a limit of twelve monthly payments) allowed in the Senior Management Royal Decree in cases involving a unilateral decision by the employer or unjustified dismissal, respectively, were not minimum amounts of severance in that the law expressly allows the parties to agree otherwise.
The Supreme Court (on dismissing a cassation appeal lodged by the government lawyer against the National Appellate Court's judgment of March 8, 2017) has now found in favor of the exemption in the specific case of termination by unilateral decision of the employer. This conclusion was reached in light of the Supreme Court’s own judgment (Labor Chamber) on April 22, 2014, under which where a senior manager’s contract is terminated as a result of a unilateral decision by the employer the senior manager is entitled to a mandatory minimum amount of severance equal to seven days per year of service with a limit of seven monthly payments. The court recalled that the National Appellate Court allowed the exemption on that mandatory minimum amount, even where there had been an express agreement excluding any severance.
It is to be expected that the same principle will apply to the severance payment equal to twenty days per year with a limit of twelve monthly payments determined in the Senior Management Royal Decree for cases of unjustified dismissal.