Decree on severance payment in cross-border situations | Deloitte Netherlands

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Decree on severance payment in cross-border situations

The State Secretary for Finance has indicated in a new Decree how taxing rights on a severance payment, following an international career, should be divided. This differs from his current policy.

14 February 2022

Introduction

In the now-repealed 23 April 2015 Decree, the State Secretary for Finance indicated that, following an international career, the division of taxing rights on a severance payment was generally set to be based on the locations where an employee had worked during the last twelve months of their employment.

New allocation method

The 25 January 2022 Decree, though, applies a new policy. From now on, the severance payment should generally be allocated according to the period of service on which the amount of the severance payment is based. This usually is the full length of service with the employer granting the severance payment. The State Secretary states that if no data on the full period of service is available, a different method to reasonably approach the allocation can also be used. If, however, this is also impossible, the taxing rights can be allocated based on the employee’s work locations during the last twelve months of employment.
Allocating the right to tax part of a severance payment to a work state is subject to the condition that this work state also had the right to tax the normal wage of the employee during the allocation period. Whether or not an employer in the state of employment has paid or borne the remuneration is not important for the allocation of severance payments. This has not changed, for that matter, compared to the previous Decree.
The above applies to a severance payment based on the length of service with the employer. On dismissal, other payments are usually paid as well. The division of the taxing rights should be determined for each payment. Per element one needs to review which country is entitled to levy tax.

Preventing mismatches

This changed policy was prompted by how other countries distribute the taxing rights on severance payments. Through this change, the State Secretary wishes to prevent double taxation or, on the contrary, non-taxation. This new method can be applied to severance payments received effective from 5 February 2022, and in situations in which tax assessments have not yet been irrevocably fixed on 5 February 2022. The latter is subject to taxpayers being able to demonstrate, if the Tax Inspector requests this, that this does not lead to double non-taxation (or partial double non-taxation).

Examples

In the 25 January 2022 Decree, the State Secretary gives two examples of the new allocation method for severance payments.

Example 1

A resides in the Netherlands and receives a severance payment from their employer established in the Netherlands. During the greater part of their five-year employment, they worked in the Netherlands, but only in the last year of their employment did they work in Germany for eight months. Because in this case the course of the employment is sufficiently clear, the severance payment is allocated accordingly. There is a right to double taxation relief for 8/60th of the severance payment.

The allocation of the severance payment to the relevant period does not automatically mean that the taxing right on the severance payment accrues to the country in which the employment was actually exercised. The decisive factor is whether that country has the taxing right in respect of the regular wage paid for those activities (Article 15 OECD Model Convention).

Example 2

B resides in the Netherlands and receives a severance payment from their employer established in the Netherlands. The circumstances make it impossible to reasonably approach the course of the entire employment. In the past twelve months, they worked for this employer in Belgium for 190 days, in Germany for 35 days, and in the Netherlands for the remaining 15 days.

Only in respect of the work exercised in Belgium is there a right to double taxation relief, because the taxing right for that part of the salary is allocated to Belgium. The severance payment received from their employer is deemed to relate to the last twelve months of their employment. In respect of the part allocable to the work exercised in Belgium, which covers 190/240th part of the severance payment, there is a right to double taxation relief.

Other payments on termination of employment

As indicated, the above applies to a severance payment based on the length of service with the employer. If, at dismissal, other payments are made as well, one needs to review which country is entitled to levy tax on every element. Below, we will discuss a number of payments. The word ‘usually’ is stressed here, considering the many nuances applicable to concrete situations.

 

Subsequent payments for work exercised
Usually allocable to the state where the relevant work was exercised.
Payment for unused holidays and sick days
Usually allocable to the last twelve months of employment.
Continued payment during notice period (garden leave)
Usually allocable to the state where it is reasonable to assume that the work would have been exercised. In most cases this will be the location where the last work was substantially exercised.
Compensation of damage on termination of employment
The allocation depends on the damage for which compensation is granted.
Non-compete compensation
Usually allocable to the state of residence of the employee.
Compensation for pension contributions
Usually allocable to the state where the employment was exercised.
Share options and their settlement
The allocation usually takes place based on the states where the employee worked during the period between the granting of the rights and the date of dismissal.

Consideration

The State Secretary for Finance’s Decree is important. In many cases it will probably prevent double taxation and double non-taxation on a severance payment. The question remains in which cases one can fall back on the last twelve months of employment with the relevant employer as a guideline for the division of taxing rights. It would seem that through this Decree the State Secretary intends to implement a certain sequence when applying these allocation rules. If so, double taxation or double non-taxation is still a possibility though, e.g., in combination with countries that - as a standard operating procedure - allocate the taxation rights on a severance payment based on the last twelve months of the person’s employment. In such a case the double taxation (or double non-taxation) should be avoided through a mutual consultation procedure between the tax authorities of the countries involved. It should be noted that the Decree obviously contains the interpretation of the State Secretary for Finance. Question remains whether this is fully in line with the current legislation and jurisprudence.

In many cases, a more detailed analysis will be required. Hence, it is important to take note of the distribution of taxing rights when preparing a severance package.

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