The compensation to senior managers for termination, decided by the company, would be exempt from IRPF payment.

Compensation to senior managers by company decision

Compensation to senior managers for termination is exempt from personal income tax.The National Court (Judgment of March 8, 2017) has recently ruled on the treatment in the Personal Income Tax (IRPF) of the indemnities paid by the dismissal of senior managers by decision of the company.

The Chamber understands that the exemption regulated in the Personal Income Tax (IRPF) rules on compensation for dismissal or dismissal of the worker also applies to compensation paid in the context of a high employment relationship address.

The Audiencia Nacional considers that the previous criterion (contrary) must be overcome taking into account the last doctrine of the Social Chamber of the Supreme Court and its projection in the tax field (Judgment of the Fourth Chamber of the Supreme Court of April 22, 2014).

Contract clause, does not eliminate compensation

According to the High Court, the content of article 11 of the Royal Decree that regulates this employment relationship (RD 1382/1985) prevents the parties from agreeing a contractual clause that allows the termination of the contract due to the withdrawal of the employer without right to compensation.

The Court says that the parties may set a different compensation from that established in the alternative, but the agreement is not accepted in order to eliminate any compensation.

Exemption from taxing in the IRPF the indemnifications to senior managers

Based on the foregoing, the National Court (Judgment of March 8, 2017) establishes that compensation of seven days’ salary per year worked, with the limit of six monthly payments, must be considered as minimum, compulsory and independent compensation of Any covenant and, given its mandatory minimum limit, this amount must be exempt from taxation in the IRPF.

That is to say, the National Court interprets that the doctrine of the Fourth Chamber of the Supreme Court prevents the parties from agreeing on compensation of an amount inferior to those legally fixed and for that reason it grants the character of a mandatory minimum.

However, it should be borne in mind that the recent interpretation of the National Hearing is not the only possible interpretation of the doctrine of the Fourth Chamber of the Supreme Court and its effects in the tax area, since the General Directorate of Taxes and the TEAC have pronounced In a totally opposite sense; Subjecting to taxation all compensation received by senior managers.

Ángel Rivas (arp@eja.es)
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ESTUDIO JURIDICO ALMAGRO (EJA)