Legal Updates

Payment for non-compete that enables continue of employment will be classified for tax as revenue

March 23, 2018
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A company sold its business operations and entered into a non-competition agreement with some of the managers, including a one-time payment for the non-competition for each of them.

The Court held that in order to examine the classification one must distinguish between a situation of "cutting down the entire tree," in which case the remuneration will be classified as capital gain, and a non-competition stipulation that allows the manager to continue working under some reasonable restrictions or if the non-competition clause is not authentic and is nothing but a cover for another payment. In these cases, the income will be classified as revenue.  Because here there was a "softened" non-competitive stipulation that included a commitment not to engage in the managers' area of ​​business only within certain geographical limitations and for a period of only three years, it is revenue and not capital gains and should be taxed as such.