On November 19, 2013, the Lower House passed the Tax Plan 2014. The Tax Plan 2014 includes the cancellation of the annuity exemption and rebate rules for the surrender of existing annuity entitlements. In light of the cancellation of the annuity exemption, transitional rules will apply to existing annuity entitlements as at December 31, 2013. It is also possible, subject to conditions, for the transitional rules to apply to redundancy in 2014. In order to invoke the transitional rules, the nature and the extent of the exempted annuity entitlement must have been sufficiently determined or be sufficiently determinable on December 31, 2013; the agreement must show that the amount used for the financing of the entitlement has been deposited with a service provider designated by law, and the date of dismissal must be known.
Nature and extent sufficiently determined or determinable
A settlement agreement must be drawn up and signed by the employee and the employer before January 1, 2014, which shows that the employer grants the employee an entitlement to periodic payments to replace salary that has been or will be foregone. Only payments for the replacement of salary that has been or will be foregone may be used for the acquisition of an annuity entitlement. This excludes salary payments, vacation allowances or bonuses. The entitlement cannot commence later than December 31 of the year in which the employee reaches the statutory retirement age. Furthermore, the amount used to cover the acquisition price of the annuity must be known on December 31, 2013, but does not have to be transferred yet.
Provider designated by law
The agreement between the employee and the employer must show that the entitlement has been deposited with a professional insurer, an annuity private limited liability company or a bank. The annuity payment must also be designated for legally appointed beneficiaries. The employer meets these conditions if the employer and the employee have agreed that the severance pay can only be used to cover the acquisition price of an entitlement that meets the conditions of the Payroll Tax Act 1964.
Date of dismissal is known on December 31, 2013
The notice of dismissal must have been given in 2013 and the date of dismissal must be known on December 31, 2013. The date of dismissal, however, can be after 2013, but no later than July 1, 2014. The employment must be terminated within a short period of the determination of the date of dismissal. A short period is defined as being no longer than the statutory notice period, i.e. up to a maximum of six months.
Rebate rules for existing annuity entitlements
We wish to emphasize that the transitional rules do not apply to the rebate rules for the surrender of existing annuity entitlements. In 2014, taxpayers with existing annuity entitlements can opt to have the balance of the annuity entitlements paid out as a lump sum without deemed interest being levied (full surrender).
Only 80% of the surrendered amount will be subject to tax if the full surrender takes place in 2014. However, the severance payment must, in such cases, have been paid before November 15, 2013. These rules therefore do not apply to annuity entitlements formed under the transitional rights.
Now that the Lower House has passed the bill, it will be debated by the Upper House. As the Lower House managed to keep to its proposed schedule, the plenary debates and vote in the Upper House is expected to take place on December 16 and 17, 2013. We will, of course, keep you informed of developments.