In the complex landscape of labour relations in Spain, the termination of a contract does not always take the form of a traumatic dismissal or ordinary retirement. Companies and employees often opt for termination by mutual agreement to bring their employment relationship to an end, agreeing on financial compensation intended to provide stability for the departing employee. However, what appears to be a beneficial arrangement from an employment perspective can become a tax trap if the implications for personal income tax (IRPF) are not rigorously analysed.<\/p>\n
Recently, the Directorate-General for Taxation issued binding ruling DGT V1271, dated 25 May 2026, which sheds light \u2014 and raises certain red flags \u2014 on how these sums should be taxed, particularly when they are received in instalments. In this article, we will analyse why \u2018mutual agreement\u2019 is the poor relation of tax exemptions and what requirements the regulations impose for applying reductions due to irregularities.<\/p>\n
The case analysed in the ruling by the Directorate-General for Taxation concerns a taxpayer who, after more than twenty-seven years\u2019 service with their company, terminated their employment relationship by mutual agreement in 2024. The agreement reached provides for financial compensation which is not paid in a single lump sum, but is structured as monthly payments extending until 2031.<\/p>\n
The enquirer raises a reasonable query: given that the income has been generated over a period of almost three decades, is it possible to apply the 30 per cent reduction provided for gross income from employment where the period over which the income was generated exceeds two years?<\/p>\n
The first point clarified by the Directorate-General for Taxation is the classification of this income. There is no doubt in the advisory body\u2019s view that any sum received following the termination of an employment relationship constitutes income from employment. To support this assertion, the consultation cites Article 17 of Law 35\/2006<\/a> (LIRPF), stating verbatim:<\/p>\n “All payments or benefits, whatever their name or nature, whether in cash or in kind, which derive, directly or indirectly, from personal work or from an employment or statutory relationship and which do not constitute income from economic activities, shall be considered as gross income from employment. (…).”<\/em><\/p>\n Consequently, any sum paid by the company to the employee as a result of the termination of employment \u2013 whether by dismissal or by mutual agreement \u2013 is fully included in the personal income tax base as employment income.<\/p>\n One of the most painful aspects for the taxpayer in such cases is the inability to benefit from the exemption provided for in Article 7 of Law 35\/2006<\/a> for severance pay. The legislation is explicit: only severance pay in the amount mandatorily established in the Workers\u2019 Statute is exempt.<\/p>\n In the binding ruling under consideration, the Tax Authorities point out that:<\/p>\n “(…) the following are exempt from this tax: \u201ce) Severance payments for the dismissal or termination of an employee, in the amount mandatorily established in the consolidated text of the Workers\u2019 Statute, approved by Royal Legislative Decree 2\/2015 of 23 October, in its implementing regulations or, where applicable, in the regulations governing the enforcement of court judgements; compensation established by virtue of a collective agreement, settlement or contract shall not be considered as such. (…).”<\/em><\/p>\n As this is a termination by mutual agreement, the Directorate-General for Taxation concludes that this does not constitute a dismissal, but rather a private agreement. Consequently, the full amount received is taxable, and the limit of 180,000 euros exempt, which would apply in the event of unfair dismissal or dismissal on objective grounds.<\/p>\n With the exemption ruled out, the taxpayer\u2019s last hope lies in Article 18 of<\/a> Law 35\/2006,<\/a> which allows the taxable base for certain income to be reduced by 30 per cent, provided that it does not exceed the other limit of 18. 2, which sets a general limit of 300,000 euros per annum on the total amount of income to which the reduction applies, and also contains specific rules for certain high-value income arising from the termination of employment or commercial relationships. However, the Directorate-General for Taxation is particularly strict in this regard.<\/p>\n For this reduction to apply, the income must have been generated over a period of more than two years and, most importantly, must be allocated to a single tax year. The legal text cited in the enquiry states:<\/p>\n “2. The 30 per cent reduction, in the case of gross income other than that provided for in Article 17.2. (a) of this Act which have a generation period of more than two years, as well as those which are classified by regulation as being obtained in a manifestly irregular manner over time, where, in both cases, without prejudice to the provisions of the following paragraph, they are allocated to a single tax year”.<\/em><\/p>\n In the case in question, the taxpayer agreed to receive the compensation in instalments until 2031. As the income is not allocated to a single tax year, the Directorate-General for Taxation refuses to grant the general reduction provided for in Article 18(2) of Law 35\/2026.<\/p>\n One might think that Article 12.2 of the Personal Income Tax Regulations (RIRPF) would resolve the situation, as it allows the reduction to be applied to split income if the ratio between the years in which the income was generated and those in which it is allocated is greater than two. However, the Directorate-General for Taxation closes this door with a highly significant technical argument:<\/p>\n “(…) the provisions of Article 12(2) of the RIRPF do not apply, as these are not severance payments, but rather sums paid in respect of the termination of the employment relationship by mutual agreement”.<\/em><\/p>\n In other words, the benefit of the statutory instalment scheme is reserved exclusively for compensation paid upon termination of the employment relationship (dismissals or compulsory redundancies), and not for sums paid following a termination of the employment relationship by mutual agreement, which the Regulations classify in Article 12.1.f) as \u2018notoriously irregular\u2019 income, but always requiring them to be allocated to a single tax period in order for the reduction to apply.<\/p>\n As legal professionals, we must highlight the value of the tax enquiry mechanism. Article 88 of Law 58\/2003<\/a> (General Tax Law) allows taxpayers to ask the tax authorities about the tax regime applicable to them.<\/p>\nThe \u2018pitfall\u2019 of mutual agreement: Exclusion from the exemption under Article 7(e)<\/h2>\n
The 30 per cent reduction for non-compliance: The obstacle of payment by instalments<\/h2>\n
Why is the exemption for instalment payments set out in the Regulations not applied?<\/h2>\n
Legal certainty and the value of binding rulings<\/h2>\n