Legal Advice Düsseldorf

Taxation of severance payments

Your employer has offered you a severance payment for the early termination of the employment relationship? Before you sign a cancellation contract, you should seek legal and tax advice. A severance agreement should be tax-optimized so that you pay as little tax as possible.

Priviliged taxation of severance payments

A severance payment is not tax-exempt, but is subject to the priviliged taxation acc. to § 34 Income Tax Act (so called “1/5 ruling”) in the event of a payment within one year. Legislator has recognized that if the amount of the severance payment is high, the maximum tax rate would normally apply. Therefore, he has countered this with the 1/5 ruling. Only the tax rate that would count for 1/5 of the settlement amount is applied to the severance payment. Nevertheless, the tax benefit is reduced by additional taxable income. Unemployment benefits also have a negative impact on the tax benefit. In some cases it may make sense to pay off the severance payment over 5 years. That`s why it is recommendable to calculate the tax-optimal variant.

Legal and tax advice to reduce the tax burden

Based on many years of consulting experience with regard to taxation of severance payments, we help you to find the tax-otimal variant for you based on detailed comparative calculations. In addition, we also examine the draft of the severance agreement and help you to foumulate the clauses in your favor. If you have filed a dismissal protection suit by a specialist lawyer for labour law, but have not yet received a judgment, a possible court settlement should also be agreed in a tax optimized way.

Our services

  • Legal review of severance agreement
  • Advice on tax optimization of severance payment
  • Detailed comparison calculations to determine the highest tax saving possibility
  • Advice on payment date and payment type (one-time payment or spread over several years)
  • Legally formulation of clauses of the settlement agreement
  • Advice on dismissal protection suits
  • Preparation of income tax return considering priviliged taxation of severance payment