Posted: 13 May 2022 5 min. read

Constitutional Court: Law on deduction for social plan provision payments unconstitutional

Overview

In its decision of 16 March 2022 (G 228/2021-8), the Constitutional Court ruled that the provision in sec 20 para 1 (8) ITA on the deduction of severance payments from social plans is repealed as unconstitutional. The provision states that voluntary severance payments (including those from social plans) are not tax deductible unless they are taxed with the reduced rate of 6% at the level of the recipient. However, since severance payments in connection with social plans pursue different goals than individually agreed severance payments, it is a violation of the principle of equality in the opinion of the Constitutional Court. The repeal of the provision enters into force on 31 December 2022. Until then, the legislator was granted a repair period.

Facts

The complainant concluded social plan agreements for the years 2015 to 2017 to mitigate the negative impacts of affected employees from the change in operations. One-off payments were agreed for the termination of employment, which were deducted by the complainant as operating expenses in the tax returns.

A tax audit denied the deduction of the expenses according to Sec 20 para 1 (8) ITA, since the payments were not taxed with the reduced tax rate of 6% and issued new assessment notices for the years concerned. An appeal against these assessments was dismissed by the Tax Appeals Court. Subsequently, an appeal against this decision was filed with the Constitutional Court. Due to concerns about the constitutionality, a law review process was initiated.

Decision of the Constitutional Court

In its decision, the Constitutional Court stated that the intended effects for voluntary individually agreed severance payments, such as preventing the termination of employment or counteracting agreements for particularly high severance payments, were not suitable to justify a prohibition of deductions for social plan severance payments.

Moreover, the limitation of tax deductibility was incompatible with the objective of a social plan to protect the interests of older employees. The termination of an employment in the case of a change in operations requires a compensation of social and economic disadvantages for older employees and therefore fulfills other aims than individually agreed severance payments.

In the opinion of the Constitutional Court, the provision in sec 20 para 1 (8) ITA leads to objectively unjustifiable differentiations and was to be repealed as unconstitutional due to a violation of the principle of equality.

Conclusion

The Constitutional Court has repealed the provision in sec 20 para 1 (8) ITA as unconstitutional. The repeal enters into force on 31 December 2022. Until then, the legislator is  granted a repair period. With an exception for the case in question, the unconstitutional provision must be applied to all cases realized until 31 December 2022. The subsequent regulation of the deduction of severance payments remains to be seen.

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Claudia Milisits, LL.M. (WU)

Claudia Milisits, LL.M. (WU)

Manager Steuerberatung | Deloitte Österreich

Claudia Milisits ist Manager bei Deloitte in Wien. Ihre Tätigkeitsschwerpunkte liegen in der Beratung von nationalen und internationalen Unternehmensgruppen und Konzernen in den Bereichen Tax Compliance, Tax Structuring und M&A mit Fokus auf Tax Due Diligence und steuerliche Restrukturierung.

Iris Erlacher, MSc

Iris Erlacher, MSc

Senior Assistant Steuerberatung | Deloitte Österreich

Iris Erlacher ist Berufsanwärterin bei Deloitte Wien. Ihre Tätigkeitsschwerpunkte liegen in der steuerlichen Beratung von nationalen und internationalen Unternehmensgruppen und Konzernen in den Bereichen Tax Compliance, Tax Structuring und M&A mit Fokus auf Tax Due Diligence und steuerliche Restrukturierung.