Income Tax - Termination Benefits, Termination, Retirement

Verified 17 April 2024 - Directorate for Legal and Administrative Information (Prime Minister)

Did you receive a sum at the end of an employment contract? It is subject to income tax regardless of its origin (resignation, dismissal, retirement, etc.). However, an exemption is possible in certain cases. We'll tell you what you need to know.

The following amounts collected at the end of an employment contract are always taxable :

  • Allowances of breach of employment contract (compensatory allowances for notice, paid leave, compensation for non-competition)
  • Allowances of termination of contract or assignment (termination indemnity precarious premium paid at the end of a fixed-term contract, compensation paid in the event of an early termination of a fixed-term contract at the initiative of the employer, compensation for the termination of an interim assignment, etc.)

Please note

For the taxation of your allowances, you can request to benefit from the quotient system, if this exceptional income exceeds the average of your taxable income for the previous 3 years.

Redundancy payments are partly exempt income tax. In some cases, the exemption is total.

Limited exemption from severance pay

Compensation paid in the event of dismissal (out of job protection plan) is partly exempt income tax.

The amount corresponding tocompensation fixed by law or convention collective east fully exempt.

If you received more, the exemption shall be limited to one of the following amounts:

  • 2 times the amount of gross pay you received in the year before your termination
  • Half of the severance pay you received

Tax services will choose the solution that works best for you.

In this case, the exemption shall be limited to a maximum of €263,952 for allowances received in 2023 (€278,208 for 2024 allowances).

Example :

An employee shall receive severance pay of €120,000 of which €70,000 is the compensation provided for in his collective agreement. His gross remuneration for the calendar year preceding the dismissal is €40,000.

The severance pay shall be exempt up to the amount provided for in the collective agreement, i.e. €70,000.

This amount is greater than 50% of the compensation received (€120,000/2 = €60,000) but less than twice the annual gross remuneration, equal to €80,000 (€40,000 (x 2).

The compensation is therefore exempt up to the sum of €80,000.

The surplus of 40 000 (€120 000 - €80,000) is taxable.

The allowance of conventional break is exempt under the same conditions, if you are not entitled to a statutory retirement pension.

Full exemption from severance pay

The severance pay is tax-free in full in the following cases:

  • Allowance received under a social plan (job protection plan called PES)
  • Compensation and damages awarded by the judge in case of wrongful or irregular dismissal (wrongful termination, procedure not respected)
  • Special redundancy allowance due in the event of a break-up as a result of an accident at work or an occupational disease
  • Compensation for termination of employment, in particular on discriminatory grounds
  • Compensation paid in connection with a collective breach of contract
  • Compensation paid upon termination of the contract at the end of a mobility leave

Your retirement or early retirement allowance is taxable. However, a total or partial exemption is possible in certain cases.

Voluntary retirement or early retirement

The compensation paid in the event of voluntary retirement or early retirement is fully taxable.

Retirement at the initiative of the employer

Compensation paid in the event of retirement (excluding job protection plan) is partly exempt income tax.

The amount corresponding to the compensation fixed by law or collective agreement is fully exempt.

If you received more, the exemption shall be limited to one of the following amounts:

  • 2 times the amount of gross pay you received in the year before your termination
  • Half of the retirement allowance you received

Tax services will choose the solution that works best for you.

Warning  

the exemption shall be limited to a maximum of €219,960 for retirement benefits received in 2023 (€231,840 for retirement benefits received in 2024).

Severance benefits exempted in full

Retirement and early retirement allowances are fully exempt in the following cases:

  • Compensation received in connection with social plan (job protection plan, says PES)
  • Allowance of early termination of activity perceived under the scheme asbestos early retirement
  • Allowance received in the framework of early retirement-redundancy from the National Labor Fund (FNE) at the time of departure of the company, under the same conditions as the redundancy allowance

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