Is severance pay for senior executives exempt from income tax? Here is what the Supreme Court says.

Senior management contracts are subject to specific regulations due to their unique characteristics. In this article, Vicente García Elías, a labour lawyer specialising in senior management contracts, analyses the income tax exemption applicable to severance pay for senior managers in the event of dismissal.

Compensation for dismissal of a senior manager

In previous articles, we have discussed the dismissal of senior managers and the compensation to which they are entitled. We summarise the most important points of the regulation below:

• If it is the employer who terminates the senior management contract, the employee will be entitled to receive the compensation agreed in the contract. If there is no provision in the contract, the employee will be entitled to receive 7 days' salary in cash per year, up to a maximum of 6 months' salary. If the mandatory notice period of 3 or 6 months has not been respected, the remaining notice period must be added.
• In the event of disciplinary dismissal, the compensation is 20 days' salary in cash per year, up to a maximum of 12 months. If the dismissal is declared unfair or invalid, the employer and the executive must agree to reinstate the employee or compensate them. If no agreement is reached, the compensation applies.

Is severance pay for senior executives exempt from income tax?

For a long time, the Tax Agency considered that senior executives who also served as directors or administrators of the company had a commercial rather than an employment relationship with the company, so when that relationship ended, the severance pay was fully taxable under income tax. This was due to the so-called link theory, whereby the relationship as a director (commercial) absorbed the employment relationship.

Nor did the Tax Agency apply the 30% reduction in income tax for irregular income.

However, the Supreme Court has recently analysed this issue (judgment of 24 June 2025) and has understood that there may be a special employment relationship for senior management, regardless of the commercial nature of the position.

The conclusion reached by the Supreme Court is that compensation of 7 days with a maximum of 6 monthly payments is considered a mandatory minimum and is therefore exempt from personal income tax.

The same applies in the case of the dismissal of a senior manager declared unfair: compensation not exceeding the minimum amount of 20 days' salary in cash per year of service up to a maximum of 12 months is considered exempt from personal income tax.

In addition to the above, the Supreme Court considers that the 30% reduction may be applied if the requirements of the Personal Income Tax Law are met:

• That the compensation generation period is more than two years.
• That it is allocated to a single tax year.
• That it has not been applied in the last five years.
• That the maximum reduction limit of €300,000 is respected.

Limit on severance pay for senior executives in the Personal Income Tax Law

The basis for the exemption of severance pay for senior executives can be found in Article 7 e) of the Personal Income Tax Law, which establishes that:

• Severance pay for dismissal or termination of employment is exempt from tax in the amount established as mandatory by the Workers' Statute.
• The amount of the exempt compensation is limited to 180,000 euros.

Can you claim back income tax already paid on severance pay for senior executives?

The answer is that each case must be analysed by a lawyer who is an expert in senior management contracts to determine:

• The content of the senior management contract that has been signed and what has been agreed in terms of severance pay.
• The law governing senior management contracts.
• The commercial and/or employment relationship between the employee and the company.

If it is possible to claim back the income tax paid, proceedings must be initiated with the Tax Agency to claim a refund of the excess tax paid. Therefore, the following may be claimed:

• The amounts paid in income tax in financial years that are not time-barred.
• The corresponding legal interest on the excess amounts paid.

Frequently asked questions about the taxation of severance pay for senior executives

As we have seen, the taxation of severance pay for senior executives is an issue that has caused controversy and uncertainty for years, which has now been resolved by the Supreme Court ruling. Below, we answer the most frequently asked questions about the taxation of severance pay for senior executives:

Is severance pay for senior executives exempt from income tax?

The answer is yes, provided that the severance pay does not exceed the legal limits. According to the Income Tax Act, the exemption is capped at €180,000.

What happens if the severance pay exceeds €180,000?

If the compensation received by the executive exceeds €180,000, the excess must be included in the income tax base as employment income.

Can I claim back income tax paid in error in previous years?

Yes, provided that the claim is not time-barred. A refund can be requested from the Tax Agency together with the legal interest accrued.

As we have seen, the Supreme Court, with its latest ruling on the matter, has provided legal certainty and opened the door for senior executives who have paid income tax on severance pay to claim a refund.

As labour lawyers specialising in senior management contracts, if you have any doubts about whether you can claim in your case, please contact us so that we can study your case and analyse whether it is possible to apply the compensation and claim back the excess paid if you have already paid income tax.