Extinction of the senior manager's contract: compensation and taxation

After the diverse pronouncements from labour court, the Tax Department has been forced to change its criteria regarding the taxation of personal income tax on compensation for dismissal of senior managers.



Generally, when a worker is fired, the company that hired him is obliged to pay him, as compensation, the amount established by the Labor Law, which, precisely because it is compensation established by law, is exempt from personal income tax.


However, when the worker has been hired through a senior management contract and is fired, there is no fixed legal compensation established.


Compensation for dismissal due to the company's withdrawal:

In the event that the termination of the contract occurs due to withdrawal by the company, it must pay the compensation that has been agreed in the contract. If there is no agreement in this regard, the law establishes that the minimum compensation that the worker is entitled to receive is seven days' salary per year worked, with a maximum amount of six monthly payments.


Compensation for unfair dismissal:

In case of unfair dismissal, compensation is also agreed in the contract. If there is no agreement, it is 20 days per year of service, with a maximum of twelve monthly payments.


Due to this freedom of agreements, until some time ago the criterion of the Tax Department was that the compensation received by the senior manager was fully taxed in personal income tax. The Tax Department considered that the exemption was only applicable to compensation established by legal imperative, a requirement that does not occur in the case of senior managers (in which the compensation provided for in the law is subsidiary to that agreed in the contract).


However, according to the Labor Court (that is, those that settle disputes between the company and the worker), when there is no agreement, the existing subsidiary compensation (seven days in the event of withdrawal from the company, and 20 days in the event of dismissal inadmissible) should be considered as a legal minimum. Attention! In other words, if compensation has not been agreed in the senior management contract or a lower compensation has been agreed, the company is obliged to pay at least seven or 20 days per year worked, depending on the case.


Considering this interpretation of the labor courts, a recent resolution of the Central Economic-Administrative Court (TEAC) has adopted this last criterion as its own and recognizes that:


If both compensations – of seven and 20 days – are the legal minimum applicable to the senior managers, they must also be able to enjoy an exemption up to that amount.

In other words, said Court has equated the tax treatment that should be given to said compensation with that of the compensation included in the Labor Law. Reduction. On the other hand, remember that if the worker has been hired by the company for more than two years, the part of compensation that is not exempt can benefit from the 30% reduction.

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