ARTICLE
A New Judicial Precedent from the Argentina Supreme Court: Bonuses for Termination of Labor Relationships within the Framework of Staff Buyouts Are Not Levied With Income Tax
The Argentine Supreme Court considered that the bonus paid to an employee for the termination of the labor relationship by staff buyouts or mutual consent (section 241 of the Labor Contract Law) is beyond the scope of Income Tax; therefore, not subject to said tax.
July 31, 2014
1. The Case
Fernando Horacio Negri (hereinafter, the “Employee”) filed an action against the Argentine Federal Tax Authority, in order to obtain the refund of Income Tax that his employer withheld (1) upon a bonus. The bonus was paid for the termination of the employment, under a staff buyout concluded within the terms of section 241 of the Labor Contract Law (hereinafter, the “LCL”).
The dispute was to determine whether the bonus paid for the termination of employment is, or is not, levied with Income Tax.
It has to be borne in mind that the Income Tax Law (hereinafter, “ITL”) establishes in section 2, subsection 1, that individuals residing in the country pay the tax only on those incomes of a periodical nature that imply the permanence of the income-producing source.
Moreover, pursuant to section 20, subsection i) of the ITL, compensations for seniority in cases of layoffs and those which are related to death or disability caused by accidents or disease, are exempt from Income Tax.
2. The Attorney General’s Opinion
Pursuant to section 33, subsection a) of the Law No. 24,946, which provides the rules to be applied to the organization of the Argentine Public Prosecutor’s Office, before the Supreme Court judgment, the Attorney General must propose a resolution in relation to federal matters issued in extraordinary appeals.
In this case, the Attorney General held that the bonus was a direct consequence of the termination of the employment. In other words, it was the result for the loss of the income source. Consequently, she considered that the payment of the bonus lacked periodicity, nor was the source permanent, requiring it to be subject to Income Tax, pursuant to section 2, subsection 1, of the ITL.
Under this understanding, the Attorney General asserted that the judicial precedents of the Supreme Court in the “De Lorenzo Amelia” (D. 1148, XLII) and “Cuevas Luis Miguel” (“Fallos” 333:2193) cases were applicable to the case. In those decisions, the Supreme Court declared that compensations related to maternity dismissals (section 178, of the LCL) and union stability (section 52, of the Trade Union Law) are beyond the scope of Income Tax.
3. The Decision of the Argentine Supreme Court
By a decision issued on July 15, 2014, the Supreme Court confirmed the resolution proposed by the Attorney General. In order to reach such conclusion, the judges held that the bonus payment was triggered by the termination of the employment relation and that for the Employee this circumstance implies an extinction of the income source.
According to the Attorney General’s opinion, the Supreme Court also considered the rules stated in the judicial precedents “De Lorenzo, Amelia” and “Cuevas, Luis Miguel” were applicable to the case.
Finally, the judges explained that the bonus for the termination of employment lacks the periodicity and permanence in source requiring it to be subject to Income Tax, pursuant to section 2, subsection 1, ITL.
For all these reasons, the Supreme Court reversed the decision that dismissed the claim and remitted the case file to the Court of Appeals in Administrative Matters for a new judgment, according to the grounds stated.
1. AFIP General Resolution No. 2437 sets forth the obligation of employers to act as withholding agents upon the income derived from employment.
Fernando Horacio Negri (hereinafter, the “Employee”) filed an action against the Argentine Federal Tax Authority, in order to obtain the refund of Income Tax that his employer withheld (1) upon a bonus. The bonus was paid for the termination of the employment, under a staff buyout concluded within the terms of section 241 of the Labor Contract Law (hereinafter, the “LCL”).
The dispute was to determine whether the bonus paid for the termination of employment is, or is not, levied with Income Tax.
It has to be borne in mind that the Income Tax Law (hereinafter, “ITL”) establishes in section 2, subsection 1, that individuals residing in the country pay the tax only on those incomes of a periodical nature that imply the permanence of the income-producing source.
Moreover, pursuant to section 20, subsection i) of the ITL, compensations for seniority in cases of layoffs and those which are related to death or disability caused by accidents or disease, are exempt from Income Tax.
2. The Attorney General’s Opinion
Pursuant to section 33, subsection a) of the Law No. 24,946, which provides the rules to be applied to the organization of the Argentine Public Prosecutor’s Office, before the Supreme Court judgment, the Attorney General must propose a resolution in relation to federal matters issued in extraordinary appeals.
In this case, the Attorney General held that the bonus was a direct consequence of the termination of the employment. In other words, it was the result for the loss of the income source. Consequently, she considered that the payment of the bonus lacked periodicity, nor was the source permanent, requiring it to be subject to Income Tax, pursuant to section 2, subsection 1, of the ITL.
Under this understanding, the Attorney General asserted that the judicial precedents of the Supreme Court in the “De Lorenzo Amelia” (D. 1148, XLII) and “Cuevas Luis Miguel” (“Fallos” 333:2193) cases were applicable to the case. In those decisions, the Supreme Court declared that compensations related to maternity dismissals (section 178, of the LCL) and union stability (section 52, of the Trade Union Law) are beyond the scope of Income Tax.
3. The Decision of the Argentine Supreme Court
By a decision issued on July 15, 2014, the Supreme Court confirmed the resolution proposed by the Attorney General. In order to reach such conclusion, the judges held that the bonus payment was triggered by the termination of the employment relation and that for the Employee this circumstance implies an extinction of the income source.
According to the Attorney General’s opinion, the Supreme Court also considered the rules stated in the judicial precedents “De Lorenzo, Amelia” and “Cuevas, Luis Miguel” were applicable to the case.
Finally, the judges explained that the bonus for the termination of employment lacks the periodicity and permanence in source requiring it to be subject to Income Tax, pursuant to section 2, subsection 1, ITL.
For all these reasons, the Supreme Court reversed the decision that dismissed the claim and remitted the case file to the Court of Appeals in Administrative Matters for a new judgment, according to the grounds stated.
1. AFIP General Resolution No. 2437 sets forth the obligation of employers to act as withholding agents upon the income derived from employment.
This insight is a brief comment on legal news in Argentina; it does not purport to be an exhaustive analysis or to provide legal advice.