In the Spanish tax system, irregular employment income is treated uniquely under the Personal Income Tax Law (IRPF). The goal is to prevent non-recurring income from disproportionately increasing a taxpayer’s liability.
Article 18 of the IRPF outlines the specifics for such income, enabling tax reductions to lessen the burden in cases such as bonuses, stock options, or exceptional rewards.
Irregular employment income refers to income that is not received periodically. Examples include:
- Seniority bonuses earned over time
- Severance payments
- Exceptional performance-related bonuses
- Gifts
- Stock options
- Shares.
Under Article 18 of the IRPF, irregular employment income is attributed to the tax year in which it is received. This means that for tax purposes, it is included in the taxable base for the year in which the payment is made.
However, to reduce the tax impact of such income, a 30% tax reduction can be applied to income that meets the following criteria:
- Generation over a period longer than two years: This means that the income must come from work or services performed over a period longer than two years
- Received on an exceptional basis: The income must be received as a one-time payment, not on a recurring basis. If a worker receives similar payments annually, it will not be considered irregular, and the 30% reduction will not apply
- Limit on amount: The 30% reduction applies only to the first €300,000 of irregular income. Any amount exceeding this limit will not benefit from the reduction.
However, there are certain situations in which irregular employment income cannot benefit from the 30% reduction. This happens when, within the five tax periods prior to the one in which they become payable, the taxpayer has received other income generated over more than two years to which the reduction has already been applied.
Below is a practical example:
An employee receives 40,000 euros in shares as part of an agreement signed with the Company over two years ago. Since the income was generated over more than two years and is an extraordinary one-off payment, the Company can apply the 30% reduction. Therefore, the employee would only be taxed on 28,000 euros.
In summary, Article 18 of the IRPF is crucial in reducing the tax burden on irregular employment income. When applied correctly, it allows for a 30% tax benefit on the taxable base.
