NEWS
Germany: Court Decides Severance Pay May Be Split To Reduce Tax
According to a recent ruling by Germany’s Federal Fiscal Court, severance pay, paid out upon termination of employment, may be split in order to reduce the tax burden for the employee.
The ruling was made in the case of an employee whose employment with one company terminated in 2000. According to the company’s Social Plan – a binding document – DEM75,000 was due to be paid out upon termination of employment.
Despite the stipulations contained in the company’s plan, however, both the company and the employee concerned concluded a separate agreement, beneficial to the employee. Under the terms of this new agreement, the company paid an initial tax-free sum of DEM24,000 in November 2000 in the employee’s final pay packet. The remaining (taxable) DEM51,000 was then paid out in January 2001, granting the former employee a significant reduction in tax.
Not only did the former employee not declare the taxable sum of DEM51,000 in the 2000 income tax declaration, but this second instalment was declared as pension income, spread over several years, in the following 2001 declaration.
Contesting the income tax declarations of the employee in question, local tax authorities argued that the severance pay should not have been split in such a way. Referring to the company’s Social Plan, the authorities then emphasized that only one lump-sum payment should have been made. Consequently, the authorities demanded tax in arrears plus interest for 2000.
Despite this ruling, the German Federal Fiscal Court overruled the decision, citing the separate agreement put in place between the two parties. This favored privilege principle entitles company employees to benefit from more favorable settlements, it noted.
Quelle: Tax-News.com
