Termination Compensation – Part 1: Termination Compensation with Provident Features

Findea sheds light on the tax significance of severance payments with a pension character in a new series of articles.

2017

Termination Compensation – Part 1: Termination Compensation with Provident Features

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During the financial crisis, the frequency and amount of severance payments were emotionally discussed. This discussion did not shed light on the fact that there are two different characteristics in severance payments. This distinction is particularly tax-relevant. Therefore, Findea dedicates a series of articles to this topic. This first article explains the severance payment with a pension character.

What is a severance payment?

‍The original purpose of a severance payment was to ensure that long-term employees have a minimum pension. Over time, this aspect was increasingly lost, and the severance payment was used as an incentive system to attract potential employees.

‍The pension character

‍A severance payment has a pension character if it is a capital settlement from a pension scheme associated with the employment relationship (2nd pillar) or if it is a similar capital settlement by the employer (Art. 17 para. 2 DBG).

Severance payments that are considered similar are those that are paid under certain conditions when the employment relationship is terminated prematurely. This refers to the same occasions when pension schemes provide portability benefits.

A pension character can be affirmed if the severance payment solely serves to mitigate the financial consequences that can arise from the risks of death, age, and disability. The compensation calculation must consider the pension law principles. The compensation must objectively serve to maintain the recipient's standard of living adequately in the event of a pension.

A capital settlement thus has a similar character and has a pension character if the following points are cumulatively met:

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