Severance payment for termination: Items payment in lieu of notice and the proportional vacations - income tax treatment

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On October 29, 2020 the National Federal Administrative Court of Appeals ruled in the case of “Cano, Juan Carlos c/ DGI s/ recurso directo de organismo externo.

The case was related to a refund requested by Juan Carlos Cano for an amount of ARS$159,794. 

This amount had been withheld by the employer to pay Income Tax Payment on the following items:

  • Law 25,561 unjustified dismissal,
  • bonuses paid due to termination,
  • proportional vacations,
  • its proportional supplementary annual salary,
  • payment in lieu of notice, and
  • its proportional supplementary annual salary.

As per the facts and circumstances described in the sentence, Mr. Cano was dismissed without cause under the terms of provision 245 of the Employment Contract Law, after almost 20 years of an employment relationship with the Company Red Link S.A.

The severance payment amounted to ARS 436,347, out of which ARS 327,171 was used as a base to calculate Income Tax, which totaled ARS 159,794.

The employer withheld this amount to pay Income Tax payment on the following severance payment items:

  • Law 25,561 unjustified dismissal,
  • bonuses paid due to termination,
  • proportional unused vacations,
  • the proportional supplementary annual salary corresponding to point 3 above,
  • payment in lieu of notice, and
  • the proportional supplementary annual salary corresponding to point 5 above.

Mr. Cano challenged the withholding by the employer, stating that severance payment should not be levied with Income Tax.

The Argentine Tax Court issued a ruling through which the Court allowed the refund of the amounts claimed by Mr. Cano, plus costs and interests, as established by the Argentine Central Bank.

The Argentine Tax Court considered that the employer had wrongly withheld Income Tax on a portion of the severance payment.

The Argentine Tax Court took in consideration the legal precedents “De Lorenzo Amalia” c/ DGI” on June 17, 2009 and “Cuevas Luis Miguel” on November 30, 2010 in order to conclude that the severance payment items (mentioned above), was not paid as a consequence of the employment relationship, but as a consequence of its termination.

The Tax Authority appealed against such ruling, alleging that items 3, 4, 5 and 6 of the severance payment items should be subject to Income Tax.

The National Federal Administrative Court of Appeals (the Court) agreed with the Tax Authority, by alleging that section 20, ss 1 of the Income Tax Law specifically provides that the payment in lieu of the notice are not exempt from the Income Tax.

Therefore, the Court considered that the items corresponding to payment in lieu of the notice and its supplementary annual salary (items 5 – 6) should be withheld by the Income Tax.

Additionally, the Court considered that Items 3 and 4 are subject to Income Tax as they are not connected with the termination but with the employment relationship.

Summarizing, the Court clearly ruled that the items 3-6 mentioned above are taxable with the Income Tax.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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