Conditions For Allowance for Building Up Standing Rights to Periodical Payments
Advantages of Standing Right Entitling To Periodical
Payments
If in the event of a dismissal the employer pays the employee a
severance payment, there are two options of using this payment.
First, the employee may choose to have the entire severance payment
paid into his own account. If this option is chosen, a large part
of the severance payment will have to be paid to the tax
authorities at once.
The employee may also choose to use the severance payment without
withholding taxes to purchase a standing right entitling to
periodical payments. A standing right entitling to periodical
payments is a right entitling a person to future periodic payments.
If this construction is chosen, the employer will have to pay the
severance payment to an insurer or the standing right company,
which will subsequently make periodic payments to the employee.
Thus, a so-called waiver of premium is created implying that the
wage tax on the severance payment will be delayed until the moment
when the periodic payments will be enjoyed. From a tax point of
view, this is often more favorable for the employee, because only
the reduced periodic installment is added to the income, as a
result of which there is a big chance that a lower tax rate will be
used.
Conditions Allowance for Building Up Standing Rights to
Periodical Payments
The waiver of premium is regulated in Section 11
subsection 1, part g of the Wages and Salaries Tax Act 1964. The
following conditions apply to the allowance for building up
standing rights to periodical payments:
- These payments may not start later than in the year in
which the employee reaches the age of 65.
- In order to enjoy the advantage of the allowance for
building up standing rights to periodical payments the
entitlement must be placed with an insurer or with a standing
right company incorporated by the employee.
- The entitlement may not be the result of a pre-pension or
early retirement scheme that has been commuted or alienated or
is a gross amount.
- In the event of the death of the employee, the benefits may
only go to the employee's spouse or partner, or his own
children, stepchildren or foster children under the age of
30.
- The employee has not yet been paid the amount of the
severance pay in a tax sense. Wages are deemed to have been
enjoyed at the time when they are paid or set off, are made
available or become interest-bearing or claimable and
collectable for the employee.
Judgment of the Court of The Hague of 3 June
2009
A judgment of the Court of The Hague of 3 June 2009 (LJN BI8929)
has made clear that the conditions must be applied strictly. This
case concerned an employee who worked for two companies. At a
certain time the Court rescinded these employment agreements,
whereby it was agreed that a severance payment would be paid to the
employee. This payment was paid into the third-party bank account
of a civil-law notary's office in April 2004. Subsequently, in
May 2004, the civil-law notary's office transferred the amount
to the standing right company that had already been incorporated by
the former employee on 24 March 2003, using the description
"regarding standing rights payment". Later that month, a
part of the amount was transferred from this standing right company
into the account of the former employee and his spouse and on 15
June 2004 the remainder was transferred into the savings account of
the former employee and his spouse. The standing right agreement
between the standing right company and the former employee was not
signed until 24 June 2004.
The tax authorities took the position that the former employee
already had the severance payment at his disposal before the
conclusion of the standing right agreement. As a result, the former
employee would already have enjoyed the payment in a tax sense and
therefore the allowance for building up standing rights to
periodical payments would not apply. The Court found for the tax
authorities.
Tips
- The conditions for the allowance for building up standing
rights to periodical payments are strict. You should seek the
prior advice of an independent party.
- As soon as a decision to place the severance payment into a
standing right company is taken, a standing right agreement
should be entered into before payment is made.