The Spanish government has announced proposed changes to the taxation of dismissal compensation. Since 12 February 2012, the statutory severance payment for unfair dismissal is an amount equal to 33 days’ salary per year of service (incomplete years are taken into account by months) up to a maximum of 24 months’ salary. For employment contracts entered into before this date, compensation for unfair dismissal is split into two components.
- If the hiring date is after 12 February 2012: 33 days of salary per year of employment, up to a maximum of 24 months’ salary.
- If the hiring date is before 12 February 2012: Severance is calculated in two parts:
- 45 days of salary per year of employment (up to 12 February 2012).
- 33 days of salary per year of employment (after said 12 February 2012). The total severance cannot exceed 720 days of salary, unless there are more days accrued in (i), in which case this latter limit of days will apply (being this affected in any case by a limit of 42 months of salary).
The calculation of a days’ salary includes both fixed and variable remuneration received in the 12 months’ prior to dismissal. Therefore under the current rules, the more an employee earns in terms of their days’ salary, the more tax free dismissal compensation they may be eligible to receive. High earners can therefore accrue very large tax free dismissal compensation payments after a relatively short period of service.
The Spanish government proposes introducing an amendment to Law 35/2006 of 28 November relating to Personal Income Tax which would limit the amount of tax free dismissal compensation that can be paid to €180,000. At present, the proposal, not yet enacted, is that this change will apply to dismissals carried out on or after 1 August 2014.
These proposals are subject to further consultation and may be revised before being enacted. The proposed date for implementation of the new law is the date after the final legislation is published in the State Official Bulletin (this is unlikely to be before 1 January 2015). In the meantime, current tax legislation will remain in full force and effect until such time as the new law is approved. We recommend that any termination payments are agreed with the employee in gross figures. Employees who receive dismissal payments of €180,000 or more should also be advised that they may have to pay additional tax