Compensation in installments as uniform compensation

A subsequent partial payment under a severance agreement may result in the reduced taxation of the entire severance payment as extraordinary income ceasing to apply.

A severance payment is often eligible for reduced taxation if the severance payment is classified as extraordinary income. However, the prerequisite for this is that the severance payment is paid out in full within one calendar year, as otherwise the accumulation of income required for reduced taxation does not exist. The Federal Fiscal Court only allows two exceptions to this rule.

On the one hand, this is the case if the predominant main benefit is paid in one amount and only a minor partial benefit is paid in another year. It is also harmless if the employer grants additional compensation benefits for a certain transitional period in a later calendar year for reasons of social welfare. Whether the employer is obliged to provide such benefits under employment law is irrelevant.

The Federal Fiscal Court has now clarified that a uniform severance payment in partial amounts can also exist if all partial payments are attributable to the termination of the employment relationship. If, according to the severance agreements, a starting bonus is paid for the fact that the employee terminates his employment and qualification relationship with a transfer company prematurely because he starts a new employment relationship with another employer, this bonus, if it is paid in a later calendar year, can lead to the reduced taxation being ruled out. In this case, a substantial part of the severance payment, which is not to be regarded as social welfare for the employee, is paid in another calendar year.

It was also clear to the Federal Fiscal Court that the termination of the original employment relationship and the departure from the transfer company are both attributable to the loss of the job and are therefore to be regarded as a single event. Leaving the transfer company is therefore not a separate loss event for which the starting premium would have to be regarded as a new severance payment.