The excessive severance payment

The taxation on excessive severance payments aims to discourage irregularly high rewards upon the termination of the employment agreement of high earning employees. The legislator has opted for a form of pseudo-final levy (penalty levy) of 75%, which is due on the ‘excessive part’ of the severance payment. This pseudo-final levy is due by the employer and must be remitted in addition to the tax withheld from the employee on this payment (employer’s levy).

To determine whether there is an excessive severance payment, it is not relevant whether an employee actually receives a severance payment upon the termination of his employment. To assess whether there is an excessive severance payment, a calculation must be made. This involves comparing the employee’s income in the year of termination (year ‘t’) and the income in the preceding year of termination (year ‘t-1’) with the income received in the second preceding year of termination (year ‘t-2’, also known as the reference year). Only if the income in year ‘t-2’ is at least € 672,000 (2024), the penalty levy will be due. The penalty levy amounts to 75% on the excessive part of the calculated severance payment. All taxable wage components, such as salary, employee share plan benefits, and bonuses, are included in the calculation. However, the question remains whether wage components under the employment costs scheme should also be included in this calculation. 

The Court of Appeal at ‘s-Hertogenbosch 

The case submitted to the Court of Appeal can be summarized as follows.

An employee is recruited from abroad and is eligible for the 30%-ruling throughout the entire employment period. Upon termination of employment, the employee receives a severance payment, on which the penalty levy of 75% is due for the excessive part. The question that the Court had to address was whether the 30% allowance, which is specifically exempted under the employment costs scheme, should be included in the basis for this levy.

In this case, the inspector took the stance that the concept of wage should be strictly grammatically interpreted for the purpose of the penalty levy, as such tax-free allowances would be included in the basis for the penalty levy on excessive severance payments. However, the Court concluded that a historical and systematic interpretation of the law should be followed instead. According to the Court, it was not the intention of the legislator to include allowances and benefits, which are specifically exempted under the employment costs scheme, in the basis for the penalty levy on excessive severance payments.

Current status case law

The Court of Appeal at 's-Hertogenbosch confirms a decision ruled by the District Court of Zeeland-West-Brabant on May 16, 2022.  The District Court ruled that that final levy components under the employee cost scheme should not be included in the calculation of the employer’s tax on excessive severance payments.

Interestingly, the Court of Appeal Arnhem-Leeuwarden ruled in 2017 that the 30%-benefit should be included in the calculation of the excessive severance payment. Due to these conflicting stances, it is currently unclear whether wage components designated as a final levy under the employment costs scheme should be included in the basis for pseudo-final levy on excessive severance payments or not. Moreover, it remains uncertain whether the reasoning of the Court of Appeal at 's-Hertogenbosch applies exclusively to specifically exempted allowances and reimbursements or to all allowances and reimbursements designated for the final levy, including allowances and reimbursements that are designated in the discretionary tax-free budget (vrije ruimte).

Relevance for practice

The excessive severance pay is a complex scheme that can result in significant costs. Depending on the situation, the ruling by the Court of Appeal at 's-Hertogenbosch can have both positive and negative implications. Since the pseudo-final levy only applies when an employee earned € 672,000 or more in the two years preceding the termination of their employment, the 30%-ruling will have a positive effect if the employee’s income falls below this threshold after application of the 30%-ruling. 

However, the 30%-ruling will have a negative impact if the employee no longer qualifies for the 30%-ruling in the year of departure, despite having it for the two years preceding their termination. In that case, the employee’s income in the year of departure will be 30/70 (approximately 43%) higher without receiving any additional salary from their employer. As a result of the Court of Appeal at 's-Hertogenbosch’s ruling, the threshold for triggering an excessive severance pay will be reached more quickly if the € 672,000 limit is exceeded.

If such a situation arises, it is advisable to assess which ruling will be the most favorable for your organization: the ruling by the Court of Appeal at Arnhem-Leeuwarden or the ruling by the Court of Appeal at 's-Hertogenbosch. Both scenarios are defensible given the jurisprudence established up to this point. Once the Supreme Court has issued a ruling on this matter, we will provide further information. 

After reading this news item, do you need further clarification on the potential consequences of this ruling for your organization? Or are you interested in a no-obligation consultation? If so, please contact your Loyens & Loeff adviser or one of our tax advisers from our Employment & Benefits team. We will be happy to assist you.