Redundancy payments: tax treaties and OECD commentary

The new decision provides a detailed explanation of the taxation of redundancy payments in a cross-border situation. The changes are primarily based on the ruling of the Supreme Court on October 14th, 2022. This ruling has led to a reinterpretation of the commentary on the OECD Model Convention of July 15th, 2014.   

Key Changes 

The key changes in the new decision are as follows: 

1. Distinguishing between tax treaties concluded before and after July 15, 2014. 
2. Introduction of the so-called 4+ method for tax treaties concluded before July 15, 2014. 
3. Application of the OECD Commentary of July 15, 2014, for tax treaties concluded after this date. 
4. Approval for situations where the application of the 4+ method results in (partial) double taxation.

Tax treaties before and after July 15th, 2014 

The 4+ method is applied for tax treaties concluded before July 15th, 2014.  

The 4+ method was introduced by the Supreme Court in 2004. According to this method, the allocation of the right to tax a redundancy payment is determined by the state where the employment was exercised in the year of termination and the four preceding years. 

The OECD Commentary of July 15th, 2014 is applied for tax treaties concluded after July 15th, 2014. This involves allocating the redundancy payment based on the total length of service with the employer making the redundancy payment. 

The OECD Commentary provides guidelines for the tax treatment of redundancy payments. It assumes that the redundancy payment should be allocated based on the length of service on which the redundancy payment is based.

Approval for double taxation situations 

In situations where the application of the 4+ method results in (partial) double taxation (because the other treaty country applies the OECD Commentary), the OECD Commentary may be applied. This approval is granted by the State Secretary of Finance. However, this approval only applies if there is no (partial) double non-taxation. 

Mutual agreement procedure 

Is a taxpayer confronted with double taxation over their redundancy payment in situations other than those mentioned above? The Netherlands will then attempt to resolve the double taxation through a mutual agreement procedure. 

Impact on practice 

The new decision on the international allocation of redundancy payments has significant implications for practice. It has now become more complex to determine the allocation of the right to tax redundancy payments in an international context. Therefore, it is important to seek expert advice and contact an expert in this field in a timely manner. 

Have you recently received, or will you soon receive a severance payment in an international employment context, and do you have questions about this?  

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