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Written by:
Bas Hollenberg


“Tax credits taxed elsewhere” for portion of severance pay attributable to Germany

Severance pay for staff is liable for tax, being regarded as it is as employment-based wages. Employees whose severance pay is (partially) associated with work performed abroad may be entitled to tax credits taxed elsewhere owing to part of their severance pay being attribut­able to work performed in the relevant foreign country.

Case in point
In 2007 the Dutch-resident employee of a Dutch-resident employer – having consistently spent 58% of his working hours in the Netherlands against 42% in Germany – collected sever­ance pay part of which he attributed in his income tax return for 2007 to the work he had performed in Germany, with the request that he should be granted “tax credits taxed else­where” where the relevant amount was concerned.

The State Secretary for Finance in 2007 published a Decree providing for the allocation between Germany and the Netherlands of the taxing rights on severance pay. The Decree was introduced with the aim of preventing a “tax levying leak”, given that Germany as and when appropriate refrains from taxing severance pay. The Inspector of Taxes by virtue of this decree allowed a modest “tax credit taxed elsewhere”. According to the double taxation conven­tion between the Netherlands and Germany it was permissible for the severance pay to be taxed in the Netherlands in its entirety on condition that the Netherlands should grant a tax credit in prevention of double taxation where it concerned the German-earned portion. The District Court ruled in favour of exclusion of application of the Decree as the latter was wrongly at variance with the effect of the implementation of the double taxation convention.

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