Income Tax – End-of-Contract, Dismissal, and Retirement Compensation

/in /by

Verified on February 16, 2025 – Directorate of Legal and Administrative Information (Prime Minister’s Office)

If you receive compensation at the end of an employment contract, it is subject to income tax, regardless of the reason (resignation, dismissal, retirement, etc.). However, certain exemptions may apply.

  • End-of-contract compensation (e.g., severance pay, termination bonuses) is generally taxable.
  • Dismissal compensation is partially or fully exempt depending on the circumstances.
  • Retirement and early retirement compensation is usually taxable, but exemptions exist in specific cases.
 
 

End-of-Contract Compensation

The following payments received at the end of an employment contract are always taxable:

  • Severance pay (e.g., compensation for notice periods, unused leave, non-compete clauses)
  • End-of-contract or mission bonuses (e.g., precariousness bonus for fixed-term contracts, early termination compensation, interim contract termination payments)

Note: If this compensation is an exceptional income that exceeds your average taxable income from the past three years, you may request the quotient system to reduce the tax impact.

Dismissal Compensation

Severance pay due to dismissal is partially or fully tax-exempt, depending on the situation:

Partially Exempt Severance Pay

  • The portion of severance fixed by law or a collective agreement is fully exempt.
  • If the amount exceeds this limit, the exemption is capped at the most favorable of:
    • Twice your previous year’s gross salary, or
    • 50% of the severance amount received

👉 The maximum exemption is €278,208 for 2024 (€282,600 for 2025).

Fully Exempt Severance Pay

Dismissal compensation is entirely tax-free in cases such as:

  • Compensation paid under a social plan (PSE)
  • Court-awarded damages for unjustified or wrongful dismissal
  • Special severance for workplace accidents or occupational diseases
  • Compensation for unlawful dismissal (e.g., discrimination cases)
  • Payments from collective termination agreements
  • Compensation for termination at the end of mobility leave

Note: If a social plan (PSE) is later canceled (e.g., by court ruling), the compensation remains tax-exempt.

Retirement and Early Retirement Compensation

Retirement-related payments are generally taxable, but exemptions exist in some cases.

Voluntary Retirement

If you voluntarily retire, your compensation is fully taxable.

Employer-Initiated Retirement

  • The legally or contractually required severance amount is fully tax-exempt.
  • Any excess is partially exempt based on the same 50% or 2x salary rule as severance pay.
  • The maximum exemption is €231,840 for 2024 (€235,500 for 2025).

Fully Exempt Retirement Compensation

The following retirement-related payments are completely tax-free:

  • Compensation under a social plan (PSE)
  • Early retirement compensation under the asbestos early retirement scheme
  • Pre-retirement dismissal compensation under the National Employment Fund (FNE), under the same conditions as severance pay.