On 10/18/2021 Circular No. 04/2021 was published in the Official Gazette for the purpose of clarifying the cases in which severance payments or labor bonuses due to the termination of the labor relationship are subject to income tax.
It distinguishes between two types of terminations. On one side, it mentions employees who are not part of the management and executive personnel and on the other side it refers to those who do comply with such condition and in this respect it provides as follows:
In the first case, in the case of payments for terminations, whatever their denomination, of personnel considered as managers and/or executives, the circular mentions that: “The indemnities or bonuses paid on the occasion of the termination of employment (…) are outside the object of the tax and excluded from the withholding regime established by General Resolution No. 4,003 (AFIP)”.
In other words, in this case, severance payments or bonuses for termination of employees will not be subject to income tax and the withholding regime of General Resolution No. 4,003.
On the contrary, in the case of payments for termination of employees holding managerial or executive positions, the circular clarifies that: “Severance payments or bonuses paid in connection with termination of employment (…) are subject to income tax in the amount exceeding the severance amounts provided for in Section 245 of the Labor Contract Law and subject to the withholding regime mentioned in the preceding paragraph”.
It should be recalled, the second paragraph of Article 245 of the Labor Contract Law established a limit for the base salary to be considered in the indemnity calculation.
However, if that such limit is exceeded, the tax authority, through Circular No. 4/2012 -accepting the doctrine of the “Vizzoti” decision (2004) of the Supreme Court of Justice- stated that the exempt amount of the severance payment will be equal to 67% of the amount actually paid. In other words, the remaining 33% is subject to tax.
Finally, the circular issued by AFIP states that the amounts paid by the employer upon termination of employment for concepts accrued in connection with the employment relationship are subject to the tax and are subject to the withholding regime provided by General Resolution No. 4,003 (AFIP). Such is the case, among others, of the payment of vacations not taken, supplementary annual salary, conventional bonuses, severance pay, back wages, etc.
This General Resolution mentions that, if the payment of these in installments is agreed upon, two ways will be used:
If the payment of all the installments is made in the same period in which the dismissal occurs, the withholding is to be determined on the total amount of the taxed concepts and will be practiced at the time of payment of each installment in proportion to the amount of each one of them.
In case the installments are paid in more than one fiscal period, the final liquidation shall not be made until the payment of the last installment. The withholding will be determined according to Art. 7 of the same General Resolution.
We will be informing you in due course of any new developments on the matter.
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