Severance Pay – Part 3: Tax Differences

Whether a severance payment has a welfare nature or a replacement income nature is tax-relevant. Findea explains in this series of articles what each character entails and what the implications are. This third article explains the tax differences.

Differences in tax treatment

Whether a severance payment has a welfare nature (first article) or a replacement income nature (second article) is significant for tax assessment. If it is a severance payment with replacement income nature, it is taxed according to Art. 23 lit. a and c DBG. Therefore, this compensation is taxed like regular income. However, if the severance compensation has a welfare nature, it is taxed according to Art. 17 Sec. 2 DBG. Thus, it is also taxed, but separately and at a reduced welfare rate.

Employer's obligations

‍When an employer pays a severance payment to a departing employee, he must specifically demonstrate how this compensation is constituted and for what purpose its (the individual parts) are intended. If part of the compensation is attributed a welfare nature, its amount must be confirmed by the pension institution (first article). Although the employer must prepare such an itemization for the (still) employee to the tax authority, the burden of proof still lies with the employee.

Further information can be found here

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