Retention of severance pay: recent ruling from the National High Court

In a ruling dated 4 March 2026 (ECLI:ES:AN:2026:1338), the Administrative-Contentious Chamber of the Supreme Court examined the case of a company that had paid severance to several employees, which were deemed exempt according to the provisions of Article 7.e of Law 35/2006 (Law on Personal Income Tax) and, therefore, exempt from the obligation to withhold tax on these payments.

The origin of this case lies in the general verification and investigation procedures relating to the plaintiff company, which began in February 2016 and led to the Resolution of the Central Economic-Administrative Court dated 11 June 2020. The company filed an administrative appeal against this resolution, as it did not consider it compliant with the law.

In this resolution, the body concluded that, after analyzing and evaluating various evidence, six of the contract terminations were the result of an agreement between the parties to terminate the employment relationship. This circumstance means that the exemption provided in Article 7.e) of the Personal Income Tax Law (LIRPF) cannot be applied, although the reductions provided in Article 18.2 of the LIRPF and Article 11.1.f) of the Personal Income Tax Regulation (RIRPF) do apply.

The object of the ruling is, therefore, to determine whether this constitutes a justified dismissal or a dismissal by agreement of the parties, in which case the exemptions would not apply.

The National Court upheld the assessment of the Tax Inspectorate based on circumstantial evidence, considering it the result of "a precise and direct link, according to the rules of human judgment" between the established facts and the conclusion, in accordance with the provisions of Article 108 of the General Tax Law.

Thus, the assessed evidence was as follows:

• The termination letters were initially based on objective economic causes
• Subsequently, during a conciliation process prior to judicial proceedings, it was deemed that the dismissal was unjustified, acknowledging that the objective reasons were not the real reason for the termination of the employment relationship.
• In all cases, once recognized as unjustified dismissals, severance pay was chosen over reinstatement. Consequently, workers are entitled to the legally established severance pay for unjustified dismissals, which is higher than that provided for dismissals for objective reasons.
• All workers were nearing retirement age. Specifically, they were over 61 years old, so after a few months of unemployment benefits, they opted to claim their retirement pensions.
• The amount of severance received has no relation to the worker's seniority or salary. Furthermore, the older the worker, the lower the percentage of the severance, from which it can be inferred that the closer the worker is to retirement age, the lower the agreed amount. From the analysis of the amounts received, it is clear that the total amounts aim to compensate for what would have been received until retirement if the employment relationship had continued.

In this case, the Administration did not allege fraud or simulation, but simply applied the regulations corresponding to the real nature of the termination of the employment relationship.

The National High Court dismissed the company's appeal and ruled in favor of the Administration, declaring that the decision of the Central Economic Administration Court was compliant with the law.

Article from the Labor Law Department of ECIJA Madrid.