On 23 June 2016, the Ministry of Finance issued a general interpretation of the Personal Income Tax Act 1991 provisions regarding the tax exemption applicable to compensation received by employees under voluntary redundancy programmes. The interpretation introduces a new approach to the taxation of such benefits and will most likely impact the tax authorities’ practice in this respect.
This issue is directly related to the practical application of Article 21(1X3) of the Personal Income Tax Act which states that – among others – indemnities and compensation will be exempt from income tax if:
- their value or the rules for determining their value stem directly from collective labour agreements, other collective agreements, regulations or statutes referred to in the Labour Code; and
- they are not explicitly excluded from the above exemption (eg, severance paid pursuant to the provisions under the special rules of termination of employment due to reasons unrelated to employees).
According to the tax authorities, severance related compensation payable to employees under collective agreements or employers’ regulations on voluntary redundancy programmes are exempt from personal income tax (regardless of the effective taxation of statutory severance pay which may be paid simultaneously).
The complete article is available for download as a PDF.