Taxation in the indemnification of high-leading contracts

Companies should not consider that there is any exempt compensation amount

Since the special employment relationship of the Senior Executives is expressly excluded from the application of the Workers’ Statute, the specific regulation of Royal Decree 1382/1985 to that effect establishes in Article 11.1 that the Senior Executive is entitled, in case of termination of the contract by the employer, to the indemnities agreed in the contract or, in the absence of agreement, to compensation of seven days of salary in cash per year of service.

Based on such consideration, the Supreme Court established in the judgment of the Social Chamber on April 22^nd 2014 (cassation for the unification of doctrine 1197/2013), that compensation for senior executives is considered an amount of right minimum unavailable, contrary to the constant opinion of the Tax Administration (Directorate General of Taxes, Inspection of the Tax Agency and Central Economic-Administrative Tribunal) that maintains that said amount is subject to income tax because of the subsidiary nature of the rule.

The National Court in its Judgment of the Administrative Dispute Chamber of March 8^th, 2017 (appeal 242/2015), reverses a ruling of the Central Economic Administrative Court (TEAC), confirms the position of the Social Chamber of the Supreme Court and establishes that the complementary nature of the jurisprudence of the Supreme Court in the legal system makes its application mandatory for all purposes, so that seven days per year of compensation with a maximum of six months should be exempt from personal income tax.

This ruling has been appealed in cassation before the Contentious Administrative Chamber of the Supreme Court (appeal n ° 2727/2017), it has been admitted for processing and is pending judgment at present, so it is not possible to pronounce definitively on the matter.

However, despite this circumstance, we have to consider that the Directorate General of Taxes (DGT) of the Ministry of Finance has not changed, however, the criteria and continues to consider that these compensations are fully subject to income tax. In his binding consultation V2509-18, of September 18, he reiterated his opinion that there is no exempt indemnity amount, based on the settled jurisprudence on this issue of the Contentious-Administrative Chamber of the Supreme Court known so far.

CONSIDERATIONS

In this regard, after analyzing the rule, jurisprudence and the Tax Administration’s position in this regard, our recommendation is that companies should not consider that there is any amount of indemnity exempt and must submit the corresponding amounts to retention, since the Inspection of the AEAT could demand the entry of the amounts not withheld and even sanction as a tax offense non-subject to the tax.

All of this without prejudice to the indemnified manager, when making his personal income tax return can defend the exemption of seven days per year of service, or that after filing the declaration request rectification of his self-assessment and return of undue income.

On the other hand, we must take into account the 30% reduction in earned income that has a generation period of more than two years, and for which no reduction has been applied in the five previous tax years (irregular performance).

This reduction is included in article 18.2 of the Personal Income Tax Law and will be applicable to compensation amounts that are not exempt, and report this circumstance to the affected executive, such as information for the purposes of the income tax.