Labor judgment related to the income tax exemption on severance payments for years of service

In the case under analysis, the parties had agreed on the payment of a sum that included the severance payment set forth in Section 245 of the Law of Employment Contract (the “LCT"), and the Court of Appeals was called to decide if the portion of such payment in excess of the limit established by the LCT and “Vizzotti” were also exempted.

Section 245 of the LCT provides that when calculating severance payments in cases of dismissals without justified cause, the employer should pay to the employee an indemnity equivalent to one month’s salary for each year of service or fraction thereof longer than three months, based on the highest monthly regular salary received during the last year or during the time of the rendering of services, if shorter. Section 245 also provides a limit to the above calculation, determining that it cannot exceed the equivalent of three times the monthly payment of the amount resulting from the average of all remunerations provided for in the Collective Bargaining Agreement applicable to the employee at the time of the dismissal. The Argentine Supreme Court of Justice resolved in “Vizzotti” (09/14/2004) that this limit is not applicable when it leads to a decrease of thirty-three percent or more in the basis for the calculation of the severance payment.

Besides, Section 20, paragraph i) of the Income Tax Law sets forth an exemption for severance payments related to years of service in case of dismissals.

The Court of Appeals solved the case on the grounds that Section 20 of the Income Tax Law does not contain any specification concerning the way the payment should be calculated and that therefore the exemption covers the whole amount.