The purpose of this short article is to briefly comment on the change of judicial criterion regarding the tax treatment of severance payments to senior managers.
Not so long ago, the Spanish Supreme Court considered that any severance pay to senior managers was entirely subject and not exempt. This was the criterion, for instance, of the Sentence No. 4175/1994 – NFJ0004226, of December 21st of 1995. Hence, advisers recommended to always practice withholding.
However, today the proper interpretation seems to be just the opposite.
The last example of the new judicial trend can be seen in the sentence No. 1528/2019 of the Supreme Court, of November 5th of 2019, which sets aside an administrative sanction against a company that had not made a withholding to severance payment of a senior manager, which they thought to be exempt. They based on article 11 of Royal Decree 1382/1985, of August 1st, which establishes a minimum compensation of 7 days of salary per year of service, with a limit of six monthly payments. This caused a sanction of the Tax Administration.
And, as explained, the sentence of the Supreme Court of November 5th 2019 resulted in the total elimination of the sanction.
How could such a radical change have taken place?
The key to this issue lies on whether the severance pay established by article 11 of the implementing regulation for senior managers is mandatory or not: article 7.e of the Law No. 35/2006, of November 28th, of Income Tax, declares exempt all severance payments that are mandatory according to the Statute of Workers or its implementing regulations.
The new argument of the Supreme Court considers that:
· senior managers have a right to receive severance payment in case of dismissal;
· the law does not establish the amount, allowing the parts to set it in the contract and
· in case the parties had not referred to the amount, a minimum of 7 days of salary per year of service, with a limit of six monthly payments is immediately applicable.
The sentence is based on a preceding criterion, accepted by the sentence No. 1197/2013, NSJ049903 of the Supreme Court itself, of April 22nd 2014, in which the Court did not accept the validity of a contract that allowed the dismissal of a senior management without any compensation.
Needless to say that some doctrinal sector is now applicating for the refund of the undue amount.