Finally, the Supreme Court settles the controversy existing to date and consolidates its change of jurisprudential criteria, recognising that the minimum compensation provided for in the regulation of Senior Executives is exempt from Personal Income Tax (IRPF).
The Second Section of the Contentious-Administrative Chamber of the Supreme Court has issued a new judgment in which it rules that senior executives are entitled to enjoy a minimum tax exemption on the severance payments they receive when they are dismissed or terminated by their employers.
This is the second ruling in this sense, which definitively establishes the criteria to be followed and, therefore, jurisprudence that can be invoked by the rest of the Courts (and, hopefully, administrations), after various controversies in this respect with the Tax Agency, as well as with the Court itself, which a year ago had declared the compensation of a senior manager to be fully subject to personal income tax.
In the case in question, the senior manager had agreed with the company on an indemnity higher than that provided for in the Statute for ordinary workers, which had to be subsequently raised to a gross amount that finally exceeded 500,000 euros. It should be borne in mind that senior managers are governed by a Royal Decree (1382/1985) which provides for freedom of agreement between the manager and the company.
The executive initiated his claim against the tax authorities in 2013, by claiming the rectification of the self-assessment of personal income tax for the year 2012. After exhausting administrative remedies, he initiated legal proceedings until he obtained a judicial decision in the Madrid High Court of Justice, which ruled that all severance pay is subject to a tax exemption of seven days’ salary per year worked with a limit of six monthly payments, which “must be considered as a mandatory minimum compensation for cases of dismissal by the employer of a senior management employee, even in cases of express agreement, which excludes all severance pay“.
After referring this conflict to the Supreme Court, the High Court has ratified this criterion, which had already been established in a previous Ruling of November 2019 – which we commented on in our AddNEWS of last November – establishing that “in cases of termination of the senior management contract due to the employer’s withdrawal, there is a right to a mandatory minimum compensation of seven days’ salary per year of work, with a limit of six monthly payments, and, therefore, that this amount of compensation is exempt from taxation for personal incometax purposes”.