Compensation granted for moral damages suffered as a result of discrimination cannot be exempted from tax except if it is granted in the context of judicial proceedings or a mutual settlement agreement procedure conducted by the Centre for Equal Opportunities and Opposition to Racism, with determination of the individual moral damages actually suffered by the worker.
In principle, all amounts granted as compensation by reason or on the occasion of the termination of an employment contract are considered to be a taxable professional income.
The tax administration has only allowed the exemption of such compensation amounts in a very limited number of cases, especially when they cover individualised moral damages and are granted by a court decision.
In a recently published Circular of 4 January 2013 (Ci.RH.241/621.336), the tax administration nuances this position in the specific case in which a compensation is paid to a worker as a result of a mutual settlement agreement between the victim and the author of the discrimination following the intervention of the Centre for Equal Opportunities and Opposition to Racism within its legal mediation mission.
Such compensation can be exempt from tax, even in the absence of a court decision, provided that it is specifically determined to compensate an individual moral damage actually suffered by the worker and it does not cover any loss of income.
In the absence of a judicial decision, the NSSO states that an indemnity for moral damage is subject to social security contributions. However, as far as we know, the NSSO has never taken position with regard to this specific situation.
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Employers should be cautious in granting moral damages as the number of cases in which the tax administration allows the exemption of a compensation for moral damages is very limited.