Treatment of the Compensation for Stability and Union Affiliation in Income Tax

In re “Cuevas Luis Miguel v. DGI” the Argentine Supreme Court (the “Court”), overruled the decision of the Federal Court of Appeals of San Martín (the “Court of Appeals”) and following its doctrine in re “De Lorenzo, Amalia Beatriz” upheld the reimbursement sought by the taxpayer.

Section 52 of Law 23.551 provides for a special compensation that protects the union stability of employees. In this case, the taxpayer was dismissed and his employer withheld Income Tax on certain compensation amounts including the portion of the special compensation for trade union stability. The taxpayer made an application for the reimbursement with the Tax Authority but this organization argued that such compensation was not included in the exemption foreseen in Section 20 subsection i) of the Income Tax Law (“ITL”). This exemption only applies to compensation for dismissal or for death or disability resulting from accidents or illnesses in the course of employment.

The Court of Appeals applied a literal interpretation of the law and understood that section 20 of the ITL enumerates exhaustively the exemptions from income tax while subsection i) contemplates seniority pay in the case of dismissal, without considering the compensation for trade union stability and that therefore this payment should be subject to taxation.

The taxpayer appealed the decision of the Court of Appeals before the Supreme Court. Without analyzing the relevance to the ITL exemption, the Attorney General considered that the appeal should be upheld on the grounds that the compensation for trade union stability lacked the periodicity and permanence in the source required by law for it to be subject to income tax applied to individuals. In other words, without resorting to the exemption, the Attorney General understood that it was non-taxable income.

This position was upheld by the Supreme Court, confirming the conclusions of the Attorney General’s report and ordering the Tax Authority to reimburse taxpayer for the amounts previously withheld.

After the Court’s decision in re “De Lorenzo”, in which the taxability of compensation for maternity was discussed, this ruling confirms the Court’s intention to place one-time only compensations paid to the employee as a result of dismissal outside the scope of Income Tax.