Taxation of a severance payment
June 15, 2011 | 30,00 EUR | answered by StB Manuela Ponikwar
Hello,
I currently live and work abroad and have a dormant employment relationship in Germany, which my employer now wants to terminate with a termination agreement including a severance payment. I am married with two children (9 and 25 years old), have only income from rental and leasing in Germany (approx. 10,000 euros) and income from my employment abroad (Australia).
In Germany, we are subject to limited tax liability (according to our tax office).
1. Under these conditions, would it be ensured that the severance payment is taxed using the fifth-rule regulation?
2. In the severance payment calculator available online (Sueddeutsche.de), there are significant differences in net income depending on the tax class. Which tax class would be a good indicator for my expected tax burden?
Thank you in advance!
Dear client,
thank you for your inquiry, which I would like to answer in the context of an initial consultation, taking into account the required fee as follows:
The severance pay for a previously held employment in Germany is to be considered as domestic income according to §49 para. 1 No. 4 d EStG in the sense of limited income tax liability. Therefore, you are limited tax liable in Germany.
For the deduction of wage tax, limited income tax liable employees are always classified into tax class I, provided that you have submitted a so-called "Special Wage Tax Certificate" to your employer (§39d EStG). If this certificate is not available, the employer is obliged to withhold wage tax according to tax class VI.
Since the assessment period of 2008, the so-called "Fifth Rule" (§ 34 EStG) is also applicable for limited tax liable individuals, which provides a tariff reduction (i.e. reduction of progression, i.e. application of a lower tax rate).
Your employer must check whether you meet the criteria for the application of the Fifth Rule (e.g. concentration of income in one year).
According to §50 para. 2 EStG, income tax for income subject to wage tax deduction is considered as paid by the tax deduction for limited tax liable individuals.
In other words, you would generally have to pay what your employer has deducted in wage tax. Instructions for filing a tax return can be found at the bottom of the last section.
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It is important to check whether a Double Taxation Agreement (DTA) exists with your current country of residence, which determines the right to tax.
Under the agreement, severances are considered as income according to Art. 15 OECD-MA (the model of Double Taxation Agreements) / Art. 14 DTA Australia. Severances generally do not represent additional compensation for previous work. They are not paid for a specific activity carried out in Germany or abroad. Therefore, according to Art. 15 para. 1 sentence 1 OECD-MA, they are only taxable in the state where the recipient of the severance is resident.
In some countries, severance pay is tax-free. However, in countries like Belgium, the Netherlands, or Switzerland, "mutual agreements" apply, and taxation is granted to the former state of activity. As mentioned, the individual case and local taxation in Australia should be carefully examined.
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By submitting a tax return, you can apply for a tax assessment according to §46 para. 2 No. 8 EStG in conjunction with §50 para. 2 No. 4b EStG and obtain a refund of taxes paid in advance, provided that a corresponding DTA exists and would be in your favor, or if the advance tax deduction was made in tax class VI.
But be careful: Whether a tax assessment is really worthwhile for limited tax liable individuals must be carefully considered. In this case, your other (foreign) income may also be taken into account under the progression clause (i.e. affecting the tax rate) (§ 32b para. 1 No. 5 EStG).
I hope this information was helpful to you.
Yours sincerely,
Manuela Ponikwar
Tax advisor
www.ponikwar.de
