What is the employer’s tax on excessive severance payments?


Pursuant to article 32bb of the Dutch Wage Tax Act (WTA), employers are subject to tax on so-called excessive severance payments. To calculate whether there is an excessive severance payment, the wage in the year of exit of the employee (year 't') and the year ‘t-1’ are compared with the wage in year ‘t-2’. The tax can only be due if the wage in year t-2 is at least € 576,000 (2022; this amount is indexed annually). The employer’s tax amounts to 75% of the excessive part of the calculated severance payment.

What is this court case about?


Since the introduction of the employment cost scheme (werkkostenregeling), allowances and benefits are considered to be part of the taxable wage of the employee. However, the employee does not pay tax on final levy components, for which the tax is due by the employer. If the Dutch tax authorities have issued a 30% ruling with respect to a certain employee, the employer designates the 30% allowance as a final levy component and pays the 30% allowance free from tax to the employee. If the employment relationship with an employee is terminated and this employee receives a 30% allowance, the question is whether the 30% allowance should be taken into account for the application of article 32bb WTA (i.e. to determine if the threshold of EUR 576,000 in year t-2 is exceeded and if so, to calculate the employer’s tax on any excessive severance payments).

In 2017 the Court of Appeal Arnhem-Leeuwarden ruled that, based on a strict linguistic interpretation, the 30% allowance should be included in the calculation of the excessive severance payment. However, the District Court of Zeeland-West-Brabant recently ruled that, although there are good arguments for a linguistic interpretation, based on the intention of the legislator (referred to by the court as the ’legal historical and legal systemic interpretation’), final levy components should not be included in the calculation of the employer’s tax on excessive severance payments. The court points out that prior to the introduction of the employment costs scheme, allowances and benefits were not part of the taxable wage of the employee and were therefore not included in the calculation of the excessive severance payment. According to the court, the legislator did not intend to change this with the introduction of the employment costs scheme.

The court's decision applies not only to the 30% allowance, but also to other specifically exempt allowances and benefits. The court does not comment on the question whether other final levy components, for example those included in the so-called discretionary tax-free budget (vrije ruimte), should be regarded as wage for the excessive severance payments.

The decision of the District Court Zeeland-West-Brabant is not only important for the present legal question whether specifically exempt final levy components are included in the calculation of the tax on excessive severance payments. This decision also shows that legal provisions should not only be interpreted linguistically, but that the purpose and intent of a provision may also be of great importance in the interpretation.

Should you have any questions with respect to the above, please contact your trusted adviser or one of the tax advisers of our Employment & Benefits team.