In the event of termination of an employment, Dutch employers must pay a final levy at the rate of 75% to the extent there is an 'excessive severance payment'. The mechanical nature of this rule allows for tax planning, but in the case of intragroup reorganisations, there is often no attention paid to this topic until it is too late to prevent an adverse tax impact.
The excessive severance payment levy at a glance
As a preliminary remark, the reference to excessive severance payments is a misnomer, since the rule aims to penalise irregularly high remuneration when an employment is terminated.
The reason for termination of the employment is irrelevant; the levy could also apply when an employee resigns voluntarily or retires. In addition, Dutch and foreign board members of a Dutch company may also qualify as employees for the purposes of this rule. In the authors’ experience, a large portion of the excessive severance levy cases relate to (executive) board members leaving a company.
To determine whether there is an excessive severance payment subject to the 75% levy, which is due on the ‘excessive part’, a comparison needs to be made between the employee’s remuneration in the year of employment termination and (normally) the remuneration in the preceding two years. However, if the employee's remuneration in the reference years did not exceed €672,000 (the 2024 amount, which is adjusted on an annual basis for inflation), this levy does not apply in any case.
The levy is, in principle, due from the employer and is in addition to the Dutch (wage) tax withheld from the employee.
Developments in the excessive severance payment levy
Although the excessive severance payment levy has existed for many years, clarifications are still being published by the Dutch tax authorities from time to time. For example, the Dutch tax authorities confirmed during 2023 that:
The 'transfer' of an employment contract upon a merger is not a termination of employment; and
Tax treaties concluded by the Netherlands with the US and the UK could (partially) prevent the application of the levy if the employee does not live in the Netherlands.
In addition, the 's-Hertogenbosch Court of Appeals ruled on February 21 2024 that income that is exempt from a Dutch domestic tax perspective is not taken into account for the purposes of the excessive severance payment levy calculation. This is a welcome clarification for ‘30% ruling’ (a beneficial tax regime for expatriates) cases, as it makes it more difficult to reach the €672,000 threshold.
Intragroup restructuring
The excessive severance levy is, in the authors’ view, often a blind spot for companies that start a reorganisation to reduce their Dutch workforce or a corporate restructuring aimed at entity rationalisation.
When, for example, a Dutch entity is liquidated and employees are transferred within the group, the excessive severance payment levy may be triggered even when those employees keep working for the same multinational group. Structuring the transfer in a manner that did not result in a termination of the employment could have prevented the adverse tax outcome.
In addition, due to the mechanical calculation of the excessive severance levy, succession planning with a gradual decrease of responsibilities of a key employee/executive could often mitigate the adverse impact of the excessive severance payments rule. Disregarding the tax impact, it is also good governance to make sure that key employees contribute to a handover of responsibilities when they are, for example, close to retirement. In fact, employees are often happy to remain employed a bit longer, especially when this is combined with a (slight) reduction of their working hours.
Key takeaway
The Dutch excessive severance payment levy often results in adverse Dutch tax consequences for companies starting a reorganisation or restructuring. In addition, each year there are companies that are surprised by an adverse tax burden when key employees retire or switch between group entities. However, when there is timely awareness of the rule, it is often possible to mitigate the adverse Dutch tax outcome in a manner that does not strain the day-to-day operations of the Dutch employer.
