Dutch Supreme Court ruled on taxability of incapacity benefits has been saved
Dutch Supreme Court ruled on taxability of incapacity benefits
The Dutch Supreme Court rendered three judgments on incapacity benefits: one on the levying of income tax on periodic benefits, and two on the levying of wage tax on personal injury compensations granted by the employer.
7 April 2022
On 11 March 2022, the Dutch Supreme Court ruled on two cases concerning benefits related to incapacity for work. The first judgment addressed the question whether periodical incapacity benefits qualify as income from previous employment. In the second judgment, it was disputed whether the unduly paid wage tax on a compensation for loss of working capacity and immaterial damage is taxable wage. On 25 March 2022, a third judgment followed, which dealt with a personal injury compensation based on an accident insurance policy under a collective labour agreement.
The interested party has been disabled for work since 2001 and has been receiving periodic benefits from the Employee Insurance Agency (UWV) since then. The dispute is whether these periodic benefits should quality as taxable income from work and home. The Court of Appeal ruled that the nature of the periodic benefits is such that they should not be regarded as compensation for personal injury, but rather as income from previous employment. In cassation, the interested party argued that the Court of Appeal should have qualified the benefits as compensation for immaterial damage and loss of employment. This qualification prevents the benefits from being part of the taxable income from work and home. However, the Supreme Court rejected this position, arguing that case law on compensations for workplace accidents for which the employer is liable does not apply to periodic benefits such as those received by the interested party. This is not altered by fact that the interested party became incapacitated for work while in employment. Since the periodic benefits in question are provided under an insurance contract or a public law scheme, they qualify as taxable income from employment and home.
Wage tax and national insurance contributions paid
The second case concerned a person who worked for the police and developed a post-traumatic stress disorder during the performance of his duties. In 2016, his employer awarded him a EUR 710,277 gross compensation for loss of working capacity and immaterial damage, reckoning with EUR 394,914 in wage tax and national insurance contributions payable. This would result in a EUR 315,363 net benefit. However, it has now become clear that the net benefit cannot qualify as wages and the employer did not have to gross up the net benefit after all. Still, the employer decided not to reclaim the tax loss component (EUR 394,914) from the employee. Parties dispute whether wage tax and national insurance contributions are payable on this part of the compensation.
The interested party argued in cassation that the compensation, including the wage tax and national insurance contributions paid, was paid as compensation for immaterial damage and loss of working capacity. The employer decided not to reclaim the paid wage tax and national insurance contributions, precisely because they wanted to reduce the interested party’s suffering. However, the Supreme Court ruled that the appeal in cassation failed, because the arguments put forward would require a new investigation of the facts. And that is no longer possible at this stage of the proceedings. The Supreme Court did note that the situation at the time of the payment is decisive for determining the nature of the payment.
The employer paid this amount as compensation for tax damage, as they erroneously assumed the compensation for loss of working capacity and immaterial damage to qualify as taxable wage. However, as the payment of this amount is indeed based on the employment relationship, the Court of Appeal's opinion that the tax damage compensation constitutes taxable wage is therefore correct.
Payment of accident insurance
The third case concerned an employee of a Security Region (veiligheidsregio) who had been appointed as a volunteer with a municipal fire brigade. During the performance of this work, an accident occurred which left the employee with permanent injuries. The employer had taken out accident insurance under a provision in the collective labour agreement. Consequently, a personal injury compensation was paid to the interested party net of income tax. Parties dispute whether this personal injury compensation should be included in the taxable salary. The Court of Appeal ruled that the interested party derived the right to compensation for the damage he suffered from a rule governing his legal position. The payment resulting from this right should therefore be considered to be part of the salary. It makes no difference whether it is an employment relationship under public or private law.
In cassation, the Supreme Court clarified an earlier judgment, in which it ruled that compensation paid by an employer for immaterial damage and loss of working capacity following from their liability for an accident suffered by their employee - barring special circumstances, such as certain agreements in the employment contract - does not qualify as salary. The Supreme Court indicated that the phrase 'such as certain arrangements in the employment contract' means that the compensation is only part of the salary if and insofar as the employer pays a higher compensation than follows from their legal liability. Where this is not the case, there is no reason to depart from the main rule, the Supreme Court ruled. The interested party’s right to receive compensation for damage from the party liable for that damage does not materially change as a result of the inclusion of that right in the employment contract.
However, the interested party’s position that compensation for personal injury may not be included in the salary if the personal injury arose in the performance of a public duty is rejected. The Supreme Court referred the case back for redetermination whether and, if so, up to what amount the compensation awarded is part of the taxable salary.
- HR 11 maart 2022, ECLI:NL:HR:2022:158, ECLI:NL:HR:2022:348
- HR 25 maart 2022, ECLI:NL:HR:2022:444