Our foregoing posts mirrored on the relevancy of bilateral Double Taxation Agreements between countries. Determining the tax residence of a natural or legal person and, once this has been defined, establishing in which of the two territories an income should be taxed, depending on its nature, is absolutely compulsory. The present publication focuses on taxation of severance payments for non-residents.
Taxation of severance payments due to dismissal for non-residents
The conventions submitted to the model established by the OECD follow more or less uniform rules. Different types of income are defined by articles (royalties, dividends, interest received, salaries, business profits, etc.). In fact, there is a "catch-all" article that deals with other income not included in the previous articles. Sometimes it may not be easy to fit an item of income into an article. Among other reasons, there are the so-called commentaries on the articles of the OECD Model Convention (known as the OECD Model Convention, here is the full version updated to 2017), which attempt to develop in depth the particularities of each article.
Binding consultation routed to the tax authorities
In a binding consultation of June 2021, the Directorate General of Taxes refers to the comments on the article on employment income. It clarifies whether or not a severance payment can be understood as being included in this article; Certain controversies merge at this point; the consultation specifies the following:
"... in the Commentary on Article 15 (employment income) of the OECD Model Convention (OECD Model Convention), as updated in 2014, paragraph 2.7 of which states the following:
"A different situation is that of a severance payment (also referred to as "severance pay") that the employer is obliged to pay (by law or contract) to an employee for the termination of his or her employment contract. It is common, but not always the case, for such a payment to be calculated on the basis of the length of time worked for that employer. In the absence of facts or circumstances to the contrary, such a severance payment is to be regarded as remuneration falling within the scope of the Article and relating to the last 12 months of employment, proportionately divided between the locations where such employment has been executed in that period. Subsequently, such payment constitutes remuneration derived from employment within the meaning of the last sentence of Article 15(1)."
Where are severance payments for dismissal of non-residents taxed?
Therefore in the case of non-residents and depending on where the employment has been carried out in the last twelve months, the severance payment will be taxed under the rules of the employment income article of the relevant agreement (and not on that of other income or other income), unless it can be indicated that such payment does not depend on the length of time the worker has been employed.
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