Ask a tax advisor on the topic of Severance pay

Tax liability for settlement payment without loss of employment

February 4, 2022 | 60,00 EUR | answered by Steuerberater Knut Christiansen

My company, a GmbH within a group, was sold through a share deal. The employees that the group wanted to keep were transferred to a new GmbH. I remained as the only employee of my team in the old company and was transferred to a new "department" there, along with colleagues from other teams who were in the same situation as me. There, we no longer had any tasks, so we were essentially unemployed within an employment relationship.
I filed a lawsuit against this and wanted to be transferred to the new GmbH, and thus back to my old team. The judge at the district court, however, found that the non-transfer essentially amounted to being sidelined. She recommended a settlement, and in exchange for a sum of money, I waived my right to be transferred to the new GmbH.
So, I kept my job and my employment contract (only the owner of the old GmbH changed).
The judge noted that this payment may be tax-free, but a specialist would have to determine this.
The settlement reads as follows:

1) The parties agree that the employment relationship established between the plaintiff and the "old GmbH" has not been transferred to the defendant (the new GmbH).
2) The defendant pays the plaintiff the amount of xxx € without acknowledgment of any legal obligation.
3) Thus, the legal dispute is resolved.

My question: Is the payment tax-free? If so, do I have to declare it to the tax office? How should I formulate this? I think the tax office will try to impose a tax liability on me.

I also found a link that explains that a payment is only taxable if it constitutes financial compensation.

https://fgnw.justiz.rlp.de/de/startseite/detail/news/detail/News/schadensersatz-des-arbeitgebers-wegen-mobbings-diskriminierung-oder-sexueller-belaestigung-ist-kein

Steuerberater Knut Christiansen

Good evening and thank you for using frag-einen.com!

I am happy to provide you with the following feedback on your question.

In order for the payment not to be subject to tax, it must be clear either that it was paid due to bullying or that a real damage is being compensated for (the taxpayer, that is you, must prove that the employer has committed a breach of duty and that an actual damage has occurred - Ref: BFH VI R 34/16).

Please indicate in the tax return on the main form under the section "Additional information for the tax return" that you have treated the payment from the employer as genuine damages due to the settlement and therefore have not declared it, and refer to the above-mentioned BFH ruling as well as the ruling of the FG Rheinland-Pfalz (quoted by you above).

The tax office will most likely request the judgement or settlement in order to determine whether the conditions are met. I honestly have my doubts, because you have agreed to the settlement and waived the transfer to the new GmbH. There could potentially be a form of severance payment here. This would need to be derived precisely from the settlement and all circumstances.

Please note that this forum cannot replace personal advice, but only enables an initial tax assessment.

Kind regards,
Knut Christiansen
Tax consultant