When it comes to the question of tax relief on compensation for termination payments, Europe divides neatly into two. To the North and East there is little or no relief to be had. To the West and South there is some relief available. Only in France is nearly full tax relief currently available.
A great swathe of states which form what used loosely to be called Mitteleuropa but extended to run from Scandinavia right down to the Greek border and eastwards to the Russian frontier, offer no tax relief on termination payments.
In Germany and the Netherlands severance pay is treated as fully taxable. In Germany in limited cases it is possible to spread the severance payment over 5 years so the tax is spread accordingly, but the full tax remains due. In the Netherlands, a certain amount of mitigation can be obtained by similarly spreading the income receipts if the gross amount of the compensation is paid into an appropriate savings scheme.
In Poland, severance pay is fully taxed as it is in Hungary. In Hungary if the severance payment relates to a public sector job, the tax rate can be 98% although this has recently been held to be a breach of private property rights by the European Court of Human Rights.
In the Czech Republic there is relief only from social security and health insurance contributions but the severance pay is fully taxed as income.
A similar position can be found in the Baltic states and other former members of the CIS, excluding Russia.
However, cross over the Rhine heading South West and things start to improve for the compensated employee.
In Belgium up to €425 received during a notice period is exempt. This will rise to €850 in 2014. Over the Channel to the UK and the first £30,000 of non-contractual payments on termination or redundancy is tax free. Compensation payments for terminations relating to disability or discrimination are tax free without limit.
Back in France, the most generous of all European states, termination payments that don’t exceed the entitlement stated by law or collective agreement are fully tax free. Where they do exceed those entitlements, which they often do, tax relief is limited to the higher of 2 years gross salary or 50% of the total termination payment.
Drive South and in Spain partial tax relief is available but must be handled with care. In the case of individual dismissals tax relief will be lost if they are agreed by the parties rather than settled in the statutory conciliation process or court hearing. Tax relief is available on redundancy.
In Italy, payments on a termination of employment may, at the tax payer’s discretion, be taxed separately from general annual income. Greece used to have full tax exemptions for an initial amount but, as part of Greece’s austerity program, severance payments are now taxed on a graded scale from 10% for up to €12,000 to 45% for amounts above €60,000.
Finally, back over the Alps to Switzerland and tax relief on severance payments is available but only to protect older workers where the main employment is lost before full retirement and there exists a pension shortfall for the individual as a result of the termination. In these circumstances special tax treatment is possible to the extent of the pension shortfall.
So, when it comes to tax relief on severance payments Europe throws up its usual patchwork of rules and practices. However, when trying to make sense of such diversity, it can be helpful to make out the patterns.