Employers are, under certain conditions, subject to a tax levy (a ‘pseudo-final’ tax) of 75% on the salary of an employee whose employment is terminated. Recently, the Dutch Supreme Court issued in a case (in Dutch) where the interpretation of the term “wages” in the context of the pseudo-final tax on excessive severance payments was central.
The main question was whether allowances that are designated as final tax components fall within the definition of wages for the purpose of applying the pseudo-final tax on excessive severance payments. Employees are not liable for wage tax on such designated final tax components. Designated final tax components may either be exempted under targeted exemptions or charged to the employer’s discretionary margin. In line with the opinion of Advocate General Pauwels, the Supreme Court ruled that designated final tax components are indeed part of the wage definition for the purposes of the excessive severance payment tax.
Background: The pseudo-final tax on excessive severance payments
To discourage excessive severance payments, the legislator introduced the pseudo-final tax on excessive severance payments in 2008. This tax is payable by the employer and is in addition to the wage tax the employee owes on the severance payment.
The pseudo-final tax applies if the reference salary of the employee whose employment is terminated (usually the salary in year t-2) is at least €680,000 (2025). To determine whether a severance payment is considered excessive, the salary in the year of departure (t) and the year prior (t-1) is compared with the salary in year t-2.
A pseudo-final tax of 75% is imposed on the excessive portion of the severance payment.
The case
A recent case involved an employee recruited from abroad who made use of the 30%-ruling throughout its employment. Upon termination, the employee received a severance payment subject to the 75% pseudo-final tax.
The key issue was whether designated final tax components, such as the 30% ruling, count as wages in the calculation for the pseudo-final tax on excessive severance payments.
The Supreme Court ruled that even designated final tax components are included in the wage definition for the purposes of the pseudo-final tax —regardless of whether a targeted exemption applies or the amount is charged to the employer’s discretionary margin.
Practical implications
The Supreme Court’s ruling has significant practical implications. The lower court and the Court of Appeal had previously ruled that final tax components did not count toward the wage definition under the pseudo-final tax. The Supreme Court has now clarified that they do count.
Since final tax components must now be included when determining the reference salary, the €680,000 threshold will be reached more quickly in practice — making the pseudo-final tax applicable in more cases. As a result, employers face an increased risk of being subject to the 75% pseudo-final tax.
However, once the pseudo-final tax applies, the inclusion of final tax components can under certain circumstances work out favorably in the wage calculation. For this reason, it is crucial for employers to thoroughly identify all designated final tax components before finalizing an employment termination where the pseudo-final tax may be relevant. If the pseudo-final tax is applicable, we recommend a more in-depth analysis to explore ways to avoid the 75% tax. In some cases, simply changing the termination date may make a significant difference.
Do you have any questions about this matter? Feel free to contact us.