Reduced taxation – severance pay – termination agreement

In the case of redundancy payments

is usually compensation for lost or foregone income, for which a tax reduction (so-called fifths rule) can be considered. The prerequisite for this is that there is an accumulation of income. This is the case if, in addition to the compensation payment, the taxpayer receives other income which, in total, is higher than the salary he or she would have received if the employment relationship had continued undisturbed.

In a recent decision, the German Federal Fiscal Court

ruled on the reduced taxation of compensation in the course of a termination agreement with subsequent early retirement. The court has clarified that in the event of payment of a severance payment in the context of a (mutually agreed) termination of the employment relationship, compensation for the loss of the job can in principle be assumed, so that reduced taxation can be considered.

In addition, the court clarified that subsequent pension income is also to be included with its taxation share in the comparison of whether there is an aggregation of income.

According to this ruling, it can regularly be assumed in the case of termination agreements under agreement of a severance payment that it is a favored compensation if there is also an accumulation of income.

(For further comments and information, please see our Information Letter 11/2018).