Treatment of the Compensation for Dismissal in case of Pregnancy in the Income Tax

Under Argentine Labor Law the compensation for dismissal is aggravated if dismissal occurs during the course of pregnancy. In such case on top of the compensation for dismissal provided by law, the employer must pay the employee a sum equivalent to one year’s salary.

In re “De Lorenzo, Amelia Beatriz c/ DGI” the Argentine Supreme Court (the “Court”), confirming the decisions of the Argentine Tax Court (the “Tax Court”) and the Court of Appeals upheld the reimbursement sought by the plaintiff.

The plaintiff requested the reimbursement of the income tax withheld by her employer as compensation for dismissal in the case of pregnancy. The tax authority (“AFIP-DGI”) argued that this compensation was not included in the exemption provided by section 20 subsection i) of the Income Tax Law (“ITL”), since this exemption only applies to compensation for dismissal or death or incapacity produced by accidents or illnesses in the course of employment.

The Tax Court, as well as the Court of Appeals, agreed in understanding that the purpose of the compensation for dismissal is to provide the employee with means of support until they get a new job, which is harder in the case of a pregnant woman since she will have to provide support not only to herself but also to her child until she gets a new job. In this context, it was decided that the compensation for dismissal in case of pregnancy should be assimilated to the general dismissal compensation and, therefore, be exempt of income tax.

The AFIP-DGI appealed the decision of the Court of Appeals to the Supreme Court. The Attorney General understood that the appeal should be dismissed since the compensation for dismissal in the case of pregnancy lacks the periodicity and permanence in the source required by law for it to be subject to income tax. This position was upheld by the Supreme Court, confirming the conclusions of the Attorney General’s report.

In this context, the Tax Court and the Court of Appeals, considering that the compensation for dismissal in the case of pregnancy is exempt and the Supreme Court understanding that it is outside the scope of the income tax, agreed in upholding the reimbursement sought by the plaintiff.