Personal income tax exemption allowed for termination of senior managers’ employment

Royal Decree 1382/1985 of August 1, 1985 on the special employment relationship of senior managers allows senior managers to claim an exemption amounting to seven days per year with a limit of six monthly payments when their employment is terminated due to a unilateral decision by the employer. The severance payment goes up to twenty days per year with a limit of twelve monthly payments where it takes place due to unjustified dismissal. An agreement to the contrary is allowed in both cases, however.

The option to reach this agreement had caused the courts and the tax authorities to conclude repeatedly that in labor legislation there is no mandatory lower limit on severance for the termination of senior managers’ employment. This had caused them to deny the exemption that the successive personal income tax laws have allowed for dismissals or removals of senior managers, because this exemption only applies to the severance payments laid down as a mandatory obligation in the Workers’ Statute, its implementing legislation or the legislation on the enforcement of judgments, whereas those determined under an agreement, covenant or contract do not fall in that category.

The Supreme Court (Labor Chamber) in a judgment rendered on April 22, 2014 (appeal 1197/2013) held that it was not logical for the legislature to allow covenants that exclude any severance payments. On the basis of this principle the National Appellate Court (Judicial Review Chamber), in a judgment rendered on March 8, 2017 (appeal 242/2015), concluded in a case of termination by unilateral decision of the employer, that the severance payment equal to seven days per year with a limit of six monthly payments amounted to a mandatory lower limit exempt from personal income tax. Following the appeal by the government lawyer against this last judgment, the Supreme Court has now confirmed the National Appellate Court’s view, which it did in a judgment rendered on November 5, 2019 (cassation appeal 2727/2017). The following reflections by the court are worth noting:

1. The senior management relationship, according to the Workers’ Statute, is a special employment relationship, defined in the Senior Management Royal Decree, and therefore this royal decree is a piece of implementing legislation for the Workers’ Statute.
2. The judgment by the Supreme Court (Labor Chamber) in 2014 recognized the mandatory nature of the examined severance payment. Given that the cassation appeal included by Organic Law 7/2015 “entails a uniform mechanism for interpreting public law”, the case law of other supreme court chambers is transferable to the judicial review jurisdiction.

Although it does not refer to unjustified dismissals of senior managers, the view in this judgment may be regarded as transferable to those cases; and as a result as allowing the exemption to be considered applicable in these cases with a limit of twelve monthly payments.