Spanish case law sets forth that compensation for the termination of senior managers can be tax exempt
Two recent decisions of the Spanish Supreme Court dated 5 November 2019 and 4 September 2020, which now establish precedent for case law, have ended a long-term debate and have determined that, in case of unilateral termination by the company of senior management contracts, seven days’ salary per year of service up to six monthly salary payments, qualifies as mandatory compensation, and is exempt from Personal Income Tax with a maximum of EUR180,000.
This case law is a turnaround in the traditional perspective of the Spanish Directorate of Taxes and the judicial bodies, which have considered in the past that the minimum amount for the termination of senior managers set forth in Royal Decree 1382/1985, regulating senior managers employment conditions, could not benefit from the exemption foreseen in the Personal Income Tax Law. This interpretation derived of them considering that this amount was not to be held as mandatory given the nature of the Royal Decree.
The Spanish Supreme Court ends the controversy and highlights that the minimum amount of seven days’ salary per year of service, up to six monthly salary payments is to be considered as mandatory compensation. Even in case of an explicit agreement between the parties excluding any severance payment, the minimum amount provided is to be considered mandatory.
Therefore, given that the Spanish Personal Income Tax Law foresees that mandatory compensations are tax exempt, and now that the Supreme Court has recognized that senior managers are entitled to a minimum mandatory compensation for termination, this amount is eligible to apply the aforementioned exemption.
It must be noted that the door is now opened for senior managers, who did not apply the exemption to their compensation for termination, to claim to the Spanish tax authorities the refund of the undue Personal Income Tax payment.
We must expect other decisions of the Supreme Court in order to end similar disputes, such as the compensation for termination of senior managers in case of unfair dismissal (20 days’ salary per year of service, up to 12 monthly payments).