Severance Payment - Part 2: Severance Payment with Substitute Income Character

Learn how severance payments with the character of substitute income are taxed and what consequences this has.

2017

Severance Payment - Part 2: Severance Payment with Substitute Income Character

Severance payments can have one of two characteristics. There are those with a provident nature and those with an income replacement character. This distinction is important as the taxing of the severance payment differs based on the characteristics. This series of articles illustrates how to determine the characteristics and what the consequences are. This second article is dedicated to severance payments with an income replacement character.

In the first article, it was already explained when a severance payment has a provident character. If this is not the case, it can be assumed that the severance payment has an income replacement character. The reasons for such a severance payment can be very different. This type of severance payments was especially criticized in the course of the financial crisis. An income replacement character can particularly be assumed in cases where a severance payment:

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