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Income Tax - Termination, Termination, Retirement
Verified 08 avril 2021 - Legal and Administrative Information Directorate (Prime Minister)
Amounts collected at the end of an employment contract are subject to income tax regardless of their origin (resignation, dismissal, retirement, etc.). However, some may be exempted.
Amounts collected at the end of a contract of employment may be taxed, regardless of the origin of:
- Termination of employment benefits (compensatory allowances for notice, paid leave, non-competition allowance, etc.)
- Termination or Mission Allowances (Termination Allowance) precariousness premium, paid at the end of a CSD, compensation for early termination of a CSD at the initiative of the employer, termination of service allowance, etc.)
- Voluntary retirement or early retirement benefits
To complete your tax return or verify your pre-completed return, you can review the explanatory note and practical brochure on income tax . If a pre-filled amount is incorrect, you must correct it.
Exemption cap for termination benefit
Compensation for dismissal (excluding job backup plan) is partially exempt from income tax.
The amount corresponding to the compensation fixed by law or collective agreement is exempt in full.
If you received a higher amount, the exemption is limited to:
- 2 times the amount of gross compensation you received in the year before your termination,
- that is half of the severance pay you received.
Tax services will choose the solution that is most favourable to you.
Warning : the exemption is limited to a maximum of €246,816 for allowances received in 2020 (€246,816 for allowances paid in 2021).
Example :
An employee shall receive redundancy pay from €120 000 of €70 000 is the compensation provided by the collective agreement. His gross remuneration for the calendar year preceding the termination is €40,000.
The termination indemnity shall be exempt up to the amount provided for in the collective agreement, either €70 000.
This amount is greater than 50% of the compensation received (€120 000/2 = €60,000) but less than double the annual gross remuneration, equal to €80 000 (€40,000 x 2).
The allowance is therefore exempt up to the sum of € 80 000
The €40,000 (€120,000) - €80 000), is taxable.
The conventional severance pay is exempt under the same conditions, if you are not entitled to a pension from the statutory scheme.
Total Exempt
- Compensation received under a social plan (job protection plan called PSE)
- Compensation and damages awarded by the judge in case of unjustified or irregular dismissal (undue breach, procedure not respected)
- Special redundancy pay due in the event of a breakdown in the context of an accident at work or an occupational disease
- Allowance for dismissal on grounds of discrimination
- Allowances for Collective Agreement Break
- Compensation for breach of contract mobility leave
How to report?
To complete your tax return or verify your pre-completed return, you can review the explanatory note and practical brochure on income tax .If a pre-filled amount is incorrect, you must correct it.
For the taxable portion of the termination benefits, you can apply for the quotient system.
Employer-initiated retirement exemption limit
Compensation paid in case of retirement (excluding job backup plan) is partially exempt from income tax.
The amount corresponding to the compensation fixed by law or collective agreement is exempt in full.
If you received a higher amount, the exemption is limited to:
- 2 times the amount of gross compensation you received in the year before your termination,
- that is half of the retirement benefit you received.
Tax services will choose the solution that is most favourable to you.
Warning : the exemption is limited to a maximum of €205,680 for retirement benefits received in 2020.
Total Exempt
- Compensation received under a social plan (employment protection plan, known as PSE)
- Early retirement benefit received under the pre-retirement scheme
- Compensation received in connection with the early retirement and termination of the National Employment Fund (FNE) at the time of departure of the company, under the same conditions as the redundancy allowance
How to report?
You must report all of your voluntary retirement (or pre-retirement) benefits and the taxable portion of your retirement benefits.
To complete your tax return or verify your pre-completed return, you can review the explanatory note and practical brochure on income tax . If a pre-filled amount is incorrect, you must correct it.
For the taxable portion of retirement or pre-retirement benefits, you can apply for quotient system.