A Bill published in the Spanish Official Gazette on 20 June 2014 is currently being negotiated and discussed by Spanish Congress. The Bill will amend certain provisions applicable to Spanish Personal Income Tax, the most significant for this newsletter being the change of tax treatment given to severance compensation received by dismissed employees, which will now be subject to tax.

  • To date, severance compensation paid to employees – within the limits established in the Spanish Workers’ Statute – was tax-exempt whenever the legal procedure for dismissal, as amended by Act 3/2012, was properly followed.
  • According to the current wording of the Bill, from 20 June 2014 onwards any severance compensation paid to employees – within the limits established in the Spanish Workers’ Statute plus any amounts exceeding that statutory severance, if agreed – will be tax-exempt up to a cap of €2,000 per year of service considered for severance calculation purposes, as provided by law.
  • Any amounts paid to employees under long-term incentive schemes (with a vesting period of over two years) previously benefited from special tax treatment (tax exemption over 40% of total amounts received). That exemption has now been reduced to 30% and will not apply to amounts generated in a period of over two years if the employee received amounts that were subject to such an exemption in the previous five years.

This Bill is expected to be approved by the end of 2014, entering into force on 1 January 2015. However, it already contains certain provisions – such as those related to the tax treatment of severance compensation – that apply from 20 June 2014 (the date on which the Bill was published in the Official Gazette).

Actions for employers

The proposed new tax treatment given to severance compensation has created widespread controversy. Trade unions and employers’ representatives have started a negotiation process with the Spanish government aimed at reducing the negative impact of this measure. It is expected that the maximum tax-exemption cap of €2,000 will be increased.