Expert Group opinion on excessive severance packages

The Tax and Customs Administration recently published an expert group opinion on the application of the final levy where excessive severance packages are provided to directors of listed companies. More specifically, the issue of whether this final levy applies if a statutory directorship at a listed company ends and the director continues his or her activities in ordinary employment.

The excessive severance package rule may apply when an employment contract is terminated. This applies to each legal relationship. Based on the Dutch Civil Code the legal relationship between a statutory director and a listed company is not considered to be an employment contract. For payroll tax purposes the legal relationship is therefore deemed as notional employment so that statutory directors are subject to the Wages and Salaries Tax Act 1964. 

However, if a statutory directorship is converted to a normal employee position then this new legal relationship qualifies as employment. The question then is whether this should be interpreted as termination of a notional employment relationship and the start of actual employment, or vice versa. 

Upon termination of the notional employment it would have to be assessed whether a final levy is payable on the excessive part of a severance package, where the term "severance package" has been very broadly defined in these particular regulations.

The expert group opinion makes it clear that what the legislature had in mind with the excessive severance package rule was situations where an employment relationship is materially ended. If a director continues to perform similar duties for the same employer (responsible for tax withholding) there may be continued employment (notional or otherwise) which means that the excessive severance package rule does not apply. 

It must therefore be determined whether there is a continued employment relationship (notional or otherwise). Important aspects in making this assessment are the nature of the work and the conditions under which it is to be carried out.