The social charges treatment applicable to payments received on termination of employment was substantially modified with effect from 1 January 2011.  Guidance issued in April 2011 clarifies the calculation.

The French Social Administration recently issued guidance on the application of the new rules and the tax and social security treatment of termination payments.

Until the end of 2010, the social security treatment of the termination allowance was to some extent aligned with the tax treatment.  The situation changed profoundly starting on 1st January 2011.

How the tax exempt portion of the termination payment is calculated

The new legislation deals with how the portion of termination payment that is exempt from income tax, standard employment social contributions and specific social contributions Contribution Social Généralisée (“CSG”) and Contribution pour le Remboursement de la Dette Sociale (“CRDS”) is calculated.  The following three steps are applied:

Step 1.  The income tax exempt portion of the payment must be determined

For income tax purposes, termination payments are totally tax exempt if they do not exceed the termination entitlement as stated by the law or the applicable collective agreement.  When the payment exceeds the legal entitlement as would generally be the case, the tax exemption is limited to the higher of (i) two year gross salary or (ii) 50% of the total termination payment, but the tax exempt amount under (i) and (ii) may not exceed six (6) times the annual social security threshold (€212,112 in 2011).

Step 2.   The portion that may be exempt from employment social security contributions is calculated.  It corresponds to the lesser of the tax exempt portion as determined in step 1 above and three times the annual social security threshold (€106,056 in 2011).

Step 3.  The portion of the termination payment that is exempt from CSG and CRDS levies corresponds to the lesser of the exempt portion determined in the step 2 above and the legal termination payment entitlement under applicable law or collective agreements.

Commentary

The combination of the new rules and other social provisions may generate practical difficulties.  The administrative guidelines provide practical examples which explain how the calculations in steps 1 to 3 are made.

Resources

Interministerial Circular DSS 145 dated 14 April 20011; Article 80 duodecies CGI

For further information or to discuss any of the issues raised please contact Pascal Ngatsing on +33 1 53 93 94 00.