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Tax benefits for severance payments under the fifth rule

October 2, 2013 | 50,00 EUR | answered by Anton Pernitschka

Hello,

I have a question regarding the tax treatment of severance payments. My professional situation is as follows: I work in a large corporation in a department where, due to the current workload, I am not able to fully develop. In other words, I have been without a proper task for months. While I am not facing immediate termination, the management has suggested that I either apply for new positions internally or externally, or accept a severance package. The latter option is appealing to me, as I have received an interesting offer for self-employment. However, this step would only be financially feasible if the severance payment could be taxed next year under the "Fünftelregelung" (German tax law provision allowing for reduced taxation of severance payments), as I would not expect significant income in the first year of self-employment. (With normal taxation, this step would not be possible without ensuring the financial security of my family).

The key points are as follows: termination of employment by 31.12.13 through a termination agreement - payment of the severance in one and a half times the normal annual salary at the beginning of next year. For further information - my salary bracket is not in the highest tax rate, so tax benefits under the "Fünftelregelung" would be expected, if I understand correctly.

Now, I am unsure whether the tax benefit of the "Fünftelregelung" can apply in my case, as I have read that it only applies to terminations initiated by the employer. Therefore, my specific questions are:

- Can a clause in the termination agreement referencing the current work situation ensure that the "Fünftelregelung" applies - and would this be clearly recognized by the tax authorities?

- What is the normal procedure - is the taxation under the "Fünftelregelung" already deducted by the employer, and if so, what would I need to do to receive the tax-advantaged payment from the employer?

- Can the severance payment be paid in two installments over the next two years to potentially take advantage of further tax benefits?

- Since the severance payment will not be made until 1.1.14, and I do not expect significant income next year, the aggregation of income at the payment time would not exist per se. Does this matter?

I would greatly appreciate your answers to these questions.

Kind regards

Anton Pernitschka

Dear questioner,

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

If the conditions of § 34 EStG are met, the so-called fifth regulation can be applied. This includes, among other things, compensations according to § 24 No. 1 EStG or remunerations for multi-year activities.

Based on the facts, the employer will pay a severance payment that is subject to preferential tax treatment under the conditions of § 34 EStG. A specific clause in the termination agreement is not necessary in this case.

The fifth rule applies when the severance payment is made in full within one assessment period and the employee earns more due to the severance payment than they would have received if the employment had continued. The fifth rule could be applied in this case for 2014 if the annual income in 2014 is higher than the previous year's income.

If the conditions of § 39 b (3) sentence 9 EStG are met at the time of payment, the employer must already apply the fifth rule according to § 34 EStG when deducting income tax. If the employer has taxed the payment at a reduced rate, this must be reported to the tax office in the attachment N to the income tax return. If the employer has applied a normal (gross) taxation, the line "Non-reduced compensations" must be entered in the tax program in the "Income tax certificate" section.

Best regards,

Anton Pernitschka
Tax advisor