The separate taxation at the average tax rate: also for severance payments to self-employed managers

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Date:
14 Oct 2015

In its judgment of 24 September 2015 (no. 127/2015) the Constitutional Court held that the separate taxation of severance payments at the average tax rate is not only applicable to managers who are bound by an employment contract but also to self-employed managers.

 

Severance payments that are due upon dismissal are subject to a separate taxation at the average tax rate of the previous year.

Until recently, the tax authorities considered this separate taxation regime for severance payments to only be applicable to persons who were bound by an employment contract and therefore this tax regime could not be applied to severance payments made to self-employed managers.

In its judgment of 24 September 2015, the Constitutional Court ruled that the separate taxation should not be restricted to employees, but should also apply to severance payments made as a result of the termination of activities in situations other than where the beneficiary is an employee.

The Court points out that nothing in the parliamentary works of the Income Tax Code shows that the legislator had the aim to limit this separate taxation at an average tax rate to the employees who are bound by an employment contract.

In the light of this judgment, it may be considered that the position of the tax authorities on this matter is too strict. The interpretation given by the Court in accordance with the Constitution implies that the separate taxation at an average tax rate should also apply to severance payments distributed to self-employed managers.

 

> Action point

As regards severance payments to managers, the separate taxation at an average tax rate should also be applicable to managers who were self-employed.