The National Court opens the door to the AEAT to review the taxation of personal income tax on the exemptions applied to the collection of certain compensation.
In a recent ruling by the Administrative Chamber of 3 July 2019, the National Court of Justice questioned the exemption from compensation for dismissal of workers.
It should be recalled that this type of compensation is exempt from personal income tax, in accordance with Article 7.e) of Law 35/2006 on Personal Income Tax, provided that it does not derive from an agreement, arrangement or contract and always within the limits established by the Workers’ Statute.
In view of this issue, which had been relatively peaceful, the Spanish National Court considers that there may be certain circumstances which, even if an act of conciliation is carried out before the Mediation, Arbitration and Conciliation Service (SMAC), should result in the taxation of the income tax compensation. In this regard, the ruling states that the most important indications that make the compensation subject to taxation are the following:
- The age of the indemnified employees.
- The existence of a record of a generalised policy of cost reduction.
- The amount of the compensation received is much lower than that which would be due under the employment law for unfair dismissal.
- Setting the amounts of compensation without taking into account the seniority of the employees
- Absence of elements in the process of dismissal of which signs of litigation can be seen.
The analysis of the above criteria may lead the Tax Authorities to review the application of personal income tax exemptions for the collection of compensation, and it is therefore advisable to analyse the circumstances in which each dismissal occurs, as well as those that have occurred in the last 4 years and are not time-barred.