Tax treatment and social security treatment of separation compensation

The system for assessing for taxation purposes compensation payments for termination of the employment agreement or “forced termination of duties” of corporate officers has been amended by the social security financing law for 2011. This new system came into effect on 1st January 2011, subject to transitional provisions.

 

Continuation of the tax treatment of separation compensation

 

Separation compensation payments are exempted from tax for the highest of the following three limits:

 

- the amount of the dismissal compensation allowed for under the law or under the collective bargaining agreement,

- half of the total compensation paid or double the gross annual pay received during the calendar year prior to the termination, while it may not in either case exceed six (6) times the annual social security cap (known as “PASS”), which is € 212,112 for 2011,

- the total compensation payments made when they are made in the scope of a plan for safeguarding mployment (“PSE”).

 

The separation compensation payments made in connection with a court order are exempted with no limit on the amount.

 

New social security treatment of termination compensation payments

 

Starting in 2012, compensation payments for termination are exempted from social security contributions for up to the limit of the tax exemption (cf. above), while such amount may not exceed three times the PASS, i.e., € 106,056 in 2011.

 

This treatment applies also to compensation payments made in connection with enforced retirement, approved termination under the collective bargaining agreement and “forced termination of duties” of corporate officers.

 

Separation compensation payments are exempted from the special CSG and CRDS taxes within the same limits.

 

The abatement for business costs (3%) no longer applies except within the limit of four times PASS, i.e., € 141,408 in 2011.

 

Transitional arrangements pertaining to compensation payments made in 2011

 
Termination in 2010

 

For termination compensation payments paid in 2011 in respect of a termination that actually took effect by 31 December 2010 at the latest, not as part of a plan for safeguarding employment, the social security exemption applies up to the limit of six times PASS, at the highest of the following three amounts:

 

- the amount of the dismissal compensation allowed for under the law or under the collective bargaining agreement,

- half of the total compensation paid, or

- double the gross annual pay received during the calendar year prior to the termination.

 

This same treatment applies for compensation payments made in connection with an approved termination under the collective bargaining agreement and “forced termination of duties” of corporate officers.

 

For termination compensation payments made in 2011 in respect of a termination that took effect by 31 December 2010 at the latest, the applicable cap for the last two limits is five times PASS (instead of six).

 

Termination compensation payments made in 2011 in the scope of a plan for safeguarding employment reported to the government by 31 December 2010 at the latest, are exempted from social security contributions, for up to six times PASS.

 

Termination in 2011

 

For termination compensation payments paid in 2011 in respect of a termination that took effect in 2011, not as part of a plan for safeguarding employment, the social security exemption applies up to the highest of the following three amounts:

 

- the amount of the dismissal compensation allowed for under the law or under the collective bargaining agreement, for up to six (6) times the annual social security cap (“PASS”) (€ 212,112),

- half of the total compensation paid, for up to three (3) times the PASS (€ 106,056),

- double the gross annual pay received during the calendar year prior to the termination, for up to three (3) times the PASS (€ 106,056).

 

This same treatment applies also to compensation payments made in connection with approved termination under the collective bargaining agreement, enforced retirement, and “forced discontinuation of duties” of corporate officers.

 

Termination compensation payments made in 2011 in the scope of a plan for safeguarding employment reported to the government as of 1st January 2011, are exempted from social security contributions, for up to three (3) times the PASS (€ 106,056), or of the amount specified in the collective bargaining agreement, capped at six (6) times the PASS (€ 212,112).

 

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