Ask a tax advisor on the topic of Severance pay

Is the fifth rule applicable?

October 1, 2013 | 50,00 EUR | answered by Anton Pernitschka

I am currently on parental leave. In the meantime, my employer has publicly advertised my position and has now offered me a termination agreement in which the employment relationship will be terminated by the end of the year, three months before the end of the notice period (31.03.2014) - with a corresponding increase in the severance payment.

I personally aim for a termination no earlier than the end of February 2014, as otherwise significant annual tax allowances would remain "unused" - because I do not expect any further taxable income for 2014.

As expected, the employer is willing to include a payment of the severance payment in November 2013 immediately after the signing of the termination agreement.

I have checked the applicability of the fifth rule to the severance payment through internet research and consider the following conditions to be met:

(1) Payment is made in one assessment period, namely in 2013. In 2014, only regular salary and variable bonuses will be paid. These cover performance over a 12-month period and have been usual in recent years.

(2) The forced situation is given because a successor is clearly being sought.

(3) The compensation payment in November 2013 for the loss of the job (more precisely the loss of future income) is higher than the lost income if continued.

However, I have doubts about (1) and especially about (3) which I would like to evaluate.

Because in 2013, the year of the severance payment, I will not have any lost income. Rather, the employer will pay my regular salary from the end of parental leave until 31.12. The lost income will occur in 2014.

In 2014, if I can come to an agreement with the employer, I will still have income in the first two to three months. However, the payment of the severance payment, which is "artificially" (?) advanced to 2013 through contract design, instead of the usual end of the employment relationship in 2014, does not cover the lost income from April to December 2014 in the event of a continuation of the employment relationship.

The question is whether I can be certain of the applicability of the fifth rule in the annual income tax assessment for 2013 in the termination agreement described above.

Anton Pernitschka

Dear questioner,

In the context of an initial consultation and your fee commitment, while considering the regulations of this forum, I would like to answer your question.

The so-called "Fünftelregelung" (fifth rule) is applicable when the severance payment is paid in full within one tax assessment period and the employee earns more due to the severance payment than they would have received if they had continued their employment. The "Fünftelregelung" can be applied in the present case for the year 2013, if the annual income for 2013 is higher than the previous year's income.

If the employer provides additional compensation over a longer period in addition to the severance payment, these additional payments can add up to an amount that is close to the actual severance payment. In such cases, the tax office could interpret these additional payments as part of the actual severance payment. This would result in the severance payments being spread out over multiple tax assessment periods, thereby excluding any reduced taxation.

Best regards,
Anton Pernitschka
Tax advisor