Assessment of early retirement scheme on the basis of objective criteria

On Friday June 22, 2018, the Supreme Court rendered judgment as to whether a severance package should be regarded as an early retirement scheme ('regeling voor vervroegde uittreding', hereinafter: RVU). An RVU is a scheme whose sole or almost sole purpose is to provide for one or more benefits to bridge the period between the end of employment and retirement or an earlier pension date. Since 2005, the Payroll Tax Act 1964 has discouraged such schemes by means of a 52% tax on an RVU withheld for the employer, in addition to the normal tax withheld for the employee.

The case

The taxpayer agreed a social plan with the trade unions in the context of a reorganization. This plan also includes a replacement or voluntary severance scheme (hereinafter: the scheme). Employees making use of this scheme are compensated on the basis of the sub-district court formula ('kantonrechtersformule'), or as much less as the loss of income until the statutory retirement age. Account is also taken of the employee’s benefit entitlements. 

The employer requested the Dutch Tax and Customs Administration to issue a decision that the scheme is not regarded as an RVU. The tax inspector rejected this request. The District Court and the Court of Appeals ruled that there is no question of an RVU. The Supreme Court concluded that the decisive factor in assessing whether there is an RVU is whether the payments and provisions are intended to bridge or supplement the former employee’s income until the retirement date. This means that the following factors are irrelevant in the assessment of whether a scheme is an RVU:

• the withholding agent’s reasons for making payments and provisions;
• intentions and choices of employees to opt for the severance package;
• actual outflow of employees;
• amount of the redundancy payments actually agreed. 

Practical consequences

As a result of the judgment of the Supreme Court, reorganizations that result in the laying off of staff and which include a replacement or voluntary severance scheme are unlikely to be regarded as an RVU if this scheme is not intended to bridge or supplement the former employee’s income until the retirement date.