Tax regime for severance pay - Separate taxation at the average rate of the last year with professional activity

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Date:
26 Nov 2013

<p>In a circular dated 13 November 2013, the tax authorities changed their point of view on what is to be considered as the "last year with a normal professional activity". From now on, the taxpayer must have exercised a professional activity during the entire year. If not, the year cannot be taken into account to determine the tax rate, even if a replacement income was obtained.</p>

In a circular dated 13 November 2013, the tax authorities changed their point of view on what is to be considered as the "last year with a normal professional activity". From now on, the taxpayer must have exercised a professional activity during the entire year. If not, the year cannot be taken into account to determine the tax rate, even if a replacement income was obtained.

Severance pay is not taxed progressively, but at a special tax rate, such rate being the average rate of the last year in which the taxpayer had a normal professional activity ("the reference year").

Previously, the tax authorities were of the opinion that it concerned the last year during which the taxpayer had earned taxable professional income (including replacement income), whereby it was irrelevant whether a professional activity was exercised during that year or not.

This could be advantageous for employees to whom the severance pay was paid only after receiving a replacement income (e.g., unemployment benefits).

On 14 March 2013, the Supreme Court decided that a year in which the taxpayer did not exercise any professional activity during nine months, but benefited from a replacement income, cannot serve as the reference year.

As a result of this judgment, the tax authorities revised their point of view in a circular dated 13 November 2013: from now on, only the last year in which the taxpayer had a normal professional activity can be considered as the reference year.

 

> Action point

This new administrative point of view is relevant when calculating the net amount (after final taxation) of severance pay.