Tax exemption for severance pay upon termination of employment contracts
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Following the termination of an employment contract, employees may be entitled to payment of various types of compensation (compensation for unfair termination of the employment contract or severance pay agreed upon as part of a social plan, legal severance pay in the context of dismissal with notice, etc.). Those benefits are exempt from income tax in certain circumstances.
Who is concerned
The following benefits are income tax exempt:
- severance pay provided for by legislation pertaining to employment contracts, or in a collective agreement;
- compensation for unfair termination of an employment contract, as set by the labour tribunal;
- compensation for unfair termination of the employment contract as agreed upon in a settlement (an agreement reached between the employee and employer to end an existing dispute or to prevent a dispute from arising, allowing the parties to negotiate the consequences of the breaking of the employment contract through mutual concessions, entailing in particular, where the employee is concerned, agreeing not to take any legal action against the former employer for the dismissal in return for the payment of compensation beyond that provided for by law;
- voluntary severance pay in the case of termination of the employment contract by the employee, or termination by mutual consent of the parties;
- severance pay provided for in a redundancy plan;
- compensation provided for as part of a job protection plan, approved by the Minister of Labour, the amount of which is equal to the severance pay provided for by legislation pertaining to employment contracts or in a collective agreement, in case of termination of the employment contract by the employer or by mutual agreement between the parties;
- voluntary severance pay allocated in case of total or partial closure of a company and in the framework of collective redundancy.
Amount of tax exemption
Only the legal or contractual severance pay (a) is entirely tax exempt.
All of the other aforementioned forms of compensation are only exempt up to an amount equal to 12 times the social minimum wage for unskilled workers applicable on 1 January of the tax year.
If the compensation is to be split over a number of years, the monthly social minimum wage is that which is applicable on 1 January of the year in which the first instalment of the compensation is taxed.
Excluded from tax exemption
The following are excluded from tax exemption: compensation in categories a), b), c) and d) paid to people entitled either to an old-age pension or to an early old-age pension.
For employees aged 60 or over at the time of leaving employment or termination, who are entitled to neither a normal or an early old-age pension, and who normally received a salary, in each tax year, the taxable amount of which exceeds 150 % of the general taxation base limit for employees and pensioners, compensation in categories a), b), c) and d) are only exempt up to an amount equal to four times the monthly social minimum wage for unskilled workers.
How to proceed
Procedure for submitting an application
Depending on the type of compensation, the tax exemption may be awarded in the following ways:
- the compensation referred to under a), b), c) and d), falling entirely under the direct competence of the Luxembourg Inland Revenue, is automatically tax exempt (art. 115-9 of the law on income tax.
However, it is up to the employer, the employee or their representative to seek an opinion from the Luxembourg Inland Revenue on the terms and conditions of the tax withholding. To do so, the employer must contact by post the competent RTS tax office (office for tax withholdings on wages and salaries).
In this letter, the employer will indicate the name of the employee concerned, the reason for dismissal, if applicable, and the total amount of compensation awarded to the employee.
It is customary to attach the following documents to this letter, and in particular in the case of a settlement agreement signed following a dismissal:- the worker's employment contract;
- the letter of dismissal;
- the letter requesting the reasons for the dismissal;
- the letter specifying the reasons for the dismissal;
- the letter disputing the reasons for dismissal;
- the settlement agreement;
- payslips retroactively covering a period of one year up to the notification of dismissal.
In response to that request, the section for tax deductions at source issues a notice setting out the exact amount of the tax-exempt payment the beneficiary will receive, depending on the relevant caps in place.
It is also important to note that in practice, the Luxembourg Inland Revenue can be contacted via email.
For the persons concerned, the employer can apply the tax exemption without first seeking the advice of the RTS 1 bureau (Central Luxembourg), RTS Esch (South) or RTS Ettelbruck (North).
- people wishing to take advantage of tax exemption on compensation under categories e), f) and g) must apply for it on a separate sheet of paper, submitting the application to the Economic Committee (Comité de conjoncture), which will issue an opinion. The Government in Council then decides on the request for tax exemption with the assent of the Economic Committee and sends the file back to the Luxembourg Inland Revenue.
The matter can be referred directly to the Economic Committee by the persons concerned or by the companies, as well as by their legal representative (law firm, fiduciary, etc.).
The application must contain:- a list of the names of all the employees concerned, and their national identification numbers (13-digit social security number - matricule);
- a copy of the social plan, the job protection plan or, failing that, the notification of collective redundancy lodged with ADEM.
These applications must be approved by the Economic Committee in order for the Luxembourg Inland Revenue to be able to apply the tax exemption.
Severance pay in the case of dismissal with notice
Any employee dismissed with notice is entitled to severance pay (as provided for by the Labour Code), provided they can prove at least 5 years of service at the company and are not yet eligible to receive a normal old-age pension. Nevertheless, an employee who is eligible for early old-age pension is entitled to severance pay.
An employee who applied for and obtained early retirement benefit cannot apply for severance pay.
Any collective agreement may provide for amounts and conditions of allocation of severance pay which are more favourable for the employees than the Labour Code.
In calculating the amount of severance pay, account is taken of the employee's length of service in the business at the end of the notice period, regardless of whether the worker has worked during the notice period or not.
For businesses with fewer than 20 employees, the employer has the following option:
- either award severance pay;
- or extend the dismissed employee's notice period.
The employer must state their choice in the letter of dismissal.
| Employee's length of service | Severance pay | Extended notice period (substitution scheme for businesses with <20 employees) |
|---|---|---|
| less than 5 years | no severance pay | no severance pay |
| between 5 and 10 years | 1 month | 5 months |
| between 10 and 15 years | 2 months | 8 months |
| between 15 and 20 years | 3 months | 9 months |
| between 20 and 25 years | 6 months | 12 months |
| between 25 and 30 years | 9 months | 15 months |
| 30 years or more | 12 months | 18 months |
The severance pay is calculated on the basis of the gross salary or wages actually paid to the employee over the 12 months prior to the notification of termination of the employment contract.
Sickness benefits and standard incentives and extras are included in the salaries/wages used for calculating the severance pay. Overtime, bonuses and reimbursements for additional costs incurred are excluded.
Who to contact
-
Ministry of the Economy Ministry of the Economy - Economic Committee
- Address:
- 19-21, boulevard Royal L-2914 Luxembourg Luxembourg
- Phone:
- (+352) 247 84329
- Fax:
- (+352) 46 04 48
- Email address:
- info@cdc.public.lu
- Website:
- https://meco.gouvernement.lu/en.html
-
Luxembourg Inland Revenue (ACD)
- Address:
- 33, rue de Gasperich L-5826 Hesperange Luxembourg
Please click on the link above to find the competent department.
Related procedures and links
Procedures
Links
Legal references
-
Loi du 22 décembre 2006
abrogeant: - la loi modifiée du 31 juillet 1929; - l'arrêté grand-ducal modifié du 17 décembre 1938 concernant les sociétés holding; - l'arrêté grand-ducal modifié du 17 décembre 1938 sur le régime fiscal des sociétés de participations financières (Holding Companies); - la loi modifiée du 12 juillet 1977; - le règlement grand-ducal du 29 juillet 1977; - la loi du 21 juin 2005
-
Loi modifiée du 23 décembre 2005
portant 1. introduction d'une retenue à la source libératoire sur certains intérêts produits par l'épargne mobilière; 2. abrogation de l'impôt sur la fortune dans le chef des personnes physiques; 3. modification de certaines dispositions de la loi modifiée du 4 décembre 1967 concernant l'impôt sur le revenu
-
Loi modifiée du 4 décembre 1967
concernant l'impôt sur le revenu
-
Loi modifiée du 13 mai 2008
portant introduction d'un statut unique pour les salariés du secteur privé
- Code du Travail - Livre I, Titre II, Chapitre IV - Section 3
