Non-deductibility of severance payments from social plans is unconstitutional

In its decision of 16 March 2022, the Austrian Constitutional Court (VfGH) overturned the prohibition of deductions under Sec 20 para 1 subpara 8 Austrian Income Tax Act (EStG) as unconstitutional. This provision prevents the deduction of voluntary severance payments made by the employer to the extent that these exceed the amounts eligible for preferential tax treatment on the employee’s side under Sec 67 para 6 EStG.

The reasons for the unconstitutional nature of Sec 20 para 1 subpara 8 EStG from the perspective of the Constitutional Court were the special requirements for the agreement of social plans, their enforceability, and their purpose in terms of easing economic and social hardship. The court also decided that there was no objective basis for equal treatment of severance payments under social plans, which balance the interests of employer and employees, and individually agreed severance payments in the context of termination by the employer (i.e. golden handshakes).

The Constitutional Court has given legislators a period in which to make the necessary changes; Sec 20 para 1 subpara 8 EStG will thus remain on the Austrian statute books until 31 December 2022. The only cases directly affected by this decision, therefore, are those which were already pending before the Constitutional Court at the start of oral proceedings.