Personal Income Tax exemption for unjustified dismissals in the state of emergency period
Spain Tax Commentary
Article 7.e) of the Spanish Personal Income Tax Law (Law 35/2006, of November 28, 2006) allows an exemption in relation to severance payments for dismissal or removal, where the following requirements are met:
The severance must be paid in respect of a termination of employment as a result of a unilateral decision by the employer, without any agreement, covenant or contract between employer and worker.
The exemption only goes as far as the mandatory amount established in the Workers' Statute, its implementing legislation or the legislation on enforcement of judgments; in the case of individual or collective objective layoffs on technical, economic, production-related, organizational or force majeure grounds, the exemption is increased up to the mandatory amount for unjustified dismissal. All of which is subject to a €180,000 limit.
Although the Spanish Personal Income Tax Law does not expressly say this, another requirement that is being found necessary for the exemption to be claimed, consists in the dismissal process having to be carried out under the provisions in the labor legislation. In this field, it is now a settled administrative law principle that, since the 2012 labor law reform, in cases of unjustified dismissals, it is necessary for unjustified dismissal to be acknowledged by the employer in a conciliation hearing or, if the hearing ends without agreement, in the subsequent judicial proceeding. In other words, without administrative or judicial conciliation or a judgment acknowledging unjustified dismissal, the worker is not eligible for the exemption.
In the context of the current public health crisis, if we take objective dismissals in which the worker acknowledges the ground (now very limited), we find dismissals on disciplinary grounds with the following circumstances:
The dismissal letter was delivered to the worker before the declaration of the state of emergency in Royal Decree 463/2020, of March 14, 2020 (see our alert).
The worker had filed a request for conciliation with the conciliation service before the declaration of the state of emergency, which will not always have been easy due to the closure of administrative registers.
The competent conciliation nevertheless fails to schedule a time for the conciliation hearing to be held as a result of the suspension decreed following the declaration of the state of emergency, so it may happen that no conciliation hearings are held (in the short term, at least).
On top of this, judicial proceedings have also been brought to a standstill, so if the worker files a claim as a result of being unable to have an administrative conciliation hearing (for reasons unrelated to worker) this will not shorten the time periods (quite the opposite, rather). It needs to be remembered here that provision two of that same Royal Decree 463/2020 suspended the time periods in procedural laws for all jurisdictions and, in the labor jurisdiction, this royal decree-law only excludes collective disputes and the protection of fundamental rights and freedoms.
The same situation will occur for any dismissals taking place when the state of emergency has commenced, foreseeably with a greater impact on cases, because it may be harder for the request for conciliation to be filed by the worker.
Without a doubt, the delay in conciliation hearings in the current situation, and the resulting inability to settle claims related to dismissal on disciplinary grounds out of court through acknowledgement of unjustified dismissal and payment of severance, may imply a considerable loss for dismissed employees, in particularly difficult circumstances.
If this situation arises, can the employer bring forward the severance payment where it is willing to acknowledge unjustified dismissal in the administrative conciliation procedure (in a kind of return to the “fast-track” dismissal before the 2012 labor law reform)? Would this situation allow the worker to be entitled to the exemption? Would it be sufficient for the employer to confirm acknowledgement of unjustified termination at a later conciliation hearing, when conciliation centers have opened? Do these types of solutions affect the receipt of unemployment benefits?
These and other questions require a detailed analysis in each case and possible solutions need to be found.