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Redundancy Pay Finiquito And Income Tax

Posted in: Employment
Author: Richelle de Wit
Tags: , , , ,

If you are let go and are entitled to redundancy pay, part of your finiquito, then you need to declare the full amount to the tax authorities on your RENTA income tax declaration, assuming you are a resident.

If the redundancy pay meets certain requisites, it is exempt of income tax.

As long as the indemnization has been established according to the Statute of Employees, and doesn´t exceed 180.000 euros, there is no income tax to pay. If it´s in accordance with the definitions in the Statute of Employee, but exceeds 180.000 euros, you only get taxed on the excess.

For info re the indemnization calculation according to the Statute of Employees, see this FAQs from our website.

CALCULATION INDEMNIZATION

Another requisite for the indemnization to be exempt is that the ties with the employer need to be truely severed, and that the employee won´t work for the same employer, or any related company, for at least 3 years following the dismissal.

When is the redundancy pay NOT exempt of income tax?

In case there is a ´convenio, pact or contract´ in place that confirms that employer and employee have come to an agreement to pay the ´improcedente´ redundancy pay before having a judge rule on the improcedente nature of it and the employee hasn´t appealed the dismissal with the ´papeleta de reconciliación´. Any tax declarations that include a redundancy payment for ´improcedente´ dismissal, can alert the Tax Agency and chances are that they will ask you to produce the ´papeleta de reconciliación´ as proof and validation for the request for exemption of income tax.

In case you´re being offered such an indemnization, please get legal and fiscal advice and when in doubt, ask for conciliation through the SMAC so that the employer needs to confirm the ´improcedente´ nature of the dismissal there.

Redundancy paid as a result of the natural expiration of a temporary contract is not the result of a dismissal and thus NOT exempt of income tax.

More info from this website, in Spanish.

Please note: The information provided is based upon our understanding of current legislation. It is not legal advice but is provided freely to enable you to be properly informed. We recommend that if you are considering taking action, you should seek professional advice.

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