Income Tax and Bonuses for Termination of Labor Relationships

As part of a claim brought by a taxpayer to achieve the repetition of withholdings held by her former employer in respect of income tax on paid concepts derived from the interruption of the employment relationship by mutual agreement, the chief of the Revision and Appeals’ Division of Rosario II Local Branch complied with the "Negri" caselaw settled by the Argentine Supreme Court of Justice and allowed the taxpayer’s request.

In the above mentioned "Negri" case from the Supreme Court of Justice that also derived from a repetition request of taxed income tax in relation to amounts received by the employee as a "reward for termination of the employment relationship" as part of a voluntary retirement (Section 241 of the Labor Contract Law), the Court had focused on the circumstances under which taxpayers are taxed only on income "subject to a periodicity that involves permanence of the source that produces them" (Section 2 of the Income Tax Law). For that reason, the Court had taken into account that the termination of the employment relationship implies the disappearance of the employee’s source of income.

Taking this regulation into account, the Court had declared that the reward derived from the termination of the employment relationship is not under the scope of tax, as it is considered as an income that it is not likely to have periodicity nor is its source permanent, which are conditions for the application of the tax. The "Negri" ruling takes a jurisprudential line initiated by the "De Lorenzo" case and recalled in the “Cuevas” case. In all of these cases the Supreme Court established the non-taxability of the concepts received by the employee on the termination of the employment relationship for lack of regularity and permanence of source. This jurisprudential line has the approval of the Argentine Attorney General's Office, who originally initiated this reasoning.

The favorable resolution of the repetition request commented here is more than welcome to taxpayers, since, even after the enactment by the "Cuevas" and "De Lorenzo" Court precedents the Tax Authority had issued a regulation which established that "payments made in compensation for stability and union resources and dismissal due to pregnancy are not affected by income tax" (Tax Authority Regulation  N° 3/2012), the Tax Authority also issued another regulation that stressed that this situation is not replicated with the rest of the compensation for breach of the employment relationship, which was not rescinded after the ruling "Negri".

With this issuance of this resolution, the chief of the Revision and Appeals’ Division of Rosario II Local Branch of the Argentine Tax Authority not only ruled in favor of the non-taxability of termination of employment relationship bonuses -in harmony with the doctrine of the Supreme Court- but also acknowledged that "Public Administration must follow the caselaw guidelines established by the Supreme Court, abstaining from questioning or entering into controversy with them, even if a different opinion is upheld" and that "we must save the State’s from the adverse economic consequences that would result from legal action filed against it, which are expected to be lost in advance".