The current economic climate, marked by a cyclical slowdown, corporate restructuring and an increase in dismissals, has led many employees to negotiate the terms governing the termination of their employment relationships. In this context, severance pay plays a central role in discussions as a means of mitigating the social and economic consequences of job loss.
While severance pay may at first glance appear to be a straightforward mechanism of financial compensation, its legal regime is in fact particularly complex. Depending on its legal basis, whether contractual or statutory, its purpose, whether remunerative, compensatory or related to social security, and the circumstances under which it is granted, severance pay is subject to different rules under employment law, social security law and tax law. The legal classification adopted has significant consequences, in particular with regard to social security contributions, coordination with unemployment insurance and tax treatment.
This article examines severance pay from the perspective of employment law, social security law and tax law in order to identify the main practical issues involved.
Severance pay may be granted at the termination of an employment relationship only where the employer is bound to make such a payment on the basis of a binding legal source. In this respect, a distinction must be drawn between severance pay arising from contractual and severance pay deriving from statutory provisions.
A) Contractual severance pay
Here again, two situations with different legal consequences must be distinguished. First, the parties may agree on the payment of severance pay directly in the employment contract. In such a case, the employer may not make payment subject, at the time of termination, to additional conditions that were not agreed upon in advance, such as refusing to pay severance pay in the event of an immediate dismissal for just cause. In this scenario, severance pay constitutes a contractual entitlement of the employee.
Second, independently of any contractual obligation, the employer may decide to grant discretionary severance pay on a unilateral basis, pursuant to Article 322d paragraph 1 of the Swiss Code of Obligations, or within the framework of an agreement governing the terms of termination of the employment relationship. In this case, both the principle and the amount of the severance pay are optional and depend entirely on the employer’s discretion or on the agreement reached between the parties.
This raises the issue of equal treatment of employees. It is important to note that Swiss law does not recognise a general principle of equal treatment derived either from Article 328 of the Swiss Code of Obligations, which obliges the employer to protect the employee’s personality, or from Articles 28 et seq. of the Swiss Civil Code, which lay down general rules on the protection of personality rights. However, specific forms of equal treatment do exist, such as those provided under the Gender Equality Act, which prohibits discrimination based on sex, or under Annex I to the Agreement on the Free Movement of Persons, in particular Article 9 paragraph 4, which protects foreign workers who are nationals of European Union member states against practices such as wage dumping or restrictions on access to employment.
By contrast, discriminatory inequality is prohibited under Article 328 CO. According to the Swiss Federal Supreme Court, “as a general rule, the principle of contractual freedom prevails over the principle of equal treatment in employment contracts […]. However, it cannot be excluded that certain forms of discrimination may constitute a breach by the employer of its obligation to respect the employee’s personality […]. Thus, a social plan must not establish differences based on unacceptable criteria when defining the categories of workers entitled to the benefits offered or agreed, or to certain of those benefits; equal treatment finds its limits in the prohibition of arbitrariness and the prohibition of discrimination.” (Federal Supreme Court decision 4A_101/2020 of 14 April 2021). According to the same court, “a subjective decision by the employer violates the prohibition of discrimination only insofar as it expresses a devaluation of the employee’s personality and thereby infringes it. Such a situation arises only if the employee is placed in a clearly less favourable position than a large number of other employees; this is not the case, however, where the employer merely favours a few employees.” (Federal Supreme Court decision 4A_651/2017 of 4 April 2018).
It follows from this case law that granting severance pay to all employees who have been employed for a certain number of years, with the exception of a single employee, could violate the prohibition of arbitrariness. However, the principle prohibiting discriminatory inequality cannot be construed as prohibiting the employer from favouring certain specific employees over the majority of the workforce. The same applies where a more skilful employee negotiates more favourable termination conditions for him- or herself (ATF 129 III 276). Consequently, it should be borne in mind that when negotiating severance pay, the parties enjoy a wide margin of discretion, and the courts will not intervene where the employer bases its decision on relevant criteria such as age, length of service, individual performance, family situation, functions and duties within the company, or the economic situation of the department concerned.
Furthermore, it is important to note that, unlike salary, severance pay granted by the employer may be freely made subject to the condition that the employment contract terminates no later than a specified date. It is therefore possible to provide that the employee will forfeit entitlement to severance pay if the employment relationship is extended, for example in the event of illness or other periods of protection against dismissal at an inopportune juncture (Art. 336c CO) (Federal Supreme Court decision 4A_219/2013 of 4 September 2013). Subject to certain time limits, severance pay may also be made subject to repayment or reduction if the employee is rehired within a specified period. This is due to the fact that severance pay does not arise from the employment contract itself but from a discretionary undertaking by the employer.
It is also permissible to provide for deferred payment of severance pay, notwithstanding the mandatory nature of Article 339 paragraph 1 CO. Indeed, Article 339 paragraph 1 CO, which provides that “when the employment relationship ends, all claims arising therefrom fall due”, applies to claims resulting from the employment contract itself and not to claims intended to settle, on a transactional basis, the consequences of termination. Accordingly, provided that deferred payment of severance pay is stipulated in the termination agreement, it should not be contrary to the law. This solution is consistent with the option expressly reserved by Article 339c paragraph 4 CO with respect to compensation for long-term employment relationships. However, such a solution would not be acceptable where severance pay is already stipulated in the employment contract itself.
Finally, it should be noted that severance pay may in certain cases be prohibited by law. This is the case for severance pay agreed contractually or provided for in the articles of association of listed companies and paid to current or former members of the board of directors, executive board or board of advisors, or to persons closely associated with them, pursuant to Article 735c number 1 CO. By contrast, remuneration due until the end of the contract, that is until expiry of the notice period, is not regarded as severance pay. In order to prevent abuse, Article 735b paragraph 2 CO provides that the maximum duration of fixed-term contracts and the notice period for indefinite-term contracts governing the remuneration of executive management and the advisory board may not exceed one year. Moreover, these matters must be regulated imperatively in the articles of association pursuant to Article 626 paragraph 2 number 2 CO.
B) Statutory severance pay for long service
In addition to severance pay agreed on a contractual basis, Article 339c paragraph 1 CO provides that where the employment relationship of an employee aged at least 50 ends after twenty years or more of service, the employer must pay the employee a severance pay for long-term employment. It should be noted that, within a group of companies, the years of service completed with the various subsidiaries must be aggregated.
This severance pay pursues an essentially social purpose. It is intended to compensate for the economic loss suffered by an older employee who finds himself unemployed or in a professional transition, often in circumstances where future prospects are limited.
The amount of the severance pay may be determined contractually, whether in a written agreement, a standard employment contract or a collective employment agreement. Where no amount has been fixed, it is for the court to determine the severance pay at its discretion. In doing so, the court takes into account, according to the Federal Supreme Court (ATF 115 II 30), the employee’s age, the duration of the employment relationship, the level of remuneration, the employee’s family situation and economic capacity, his prospects of finding new employment, including the time required, salary level, economic capacity of the new employer and the pension arrangements offered, as well as the possible existence of pension benefits.
The severance pay must nevertheless comply with the statutory limits. It may not be less than two months’ salary and, as a rule, should not exceed eight months’ salary. The reference salary is generally the last salary received, including the thirteenth salary, variable remuneration such as commissions and profit-sharing, and gratuities. This upper limit is not mandatory, however, and the employer remains free to offer a higher severance pay if it so wishes.
Although the Federal Supreme Court criticises the general and schematic application of industry-specific scales, except where such scales are provided for in collective agreements, standard employment contracts or internal company regulations, case law from the Canton of Bern proposes, for guidance purposes, a calculation table that is regularly used as a reference.
The severance pay may be reduced or even eliminated where the employee terminates the employment contract without just cause (by analogy with Article 340c paragraph 2 CO), where the employer terminates the contract by way of immediate dismissal for just cause (Article 337 CO), or where payment of the severance pay would place the employer in a situation of serious financial hardship. These exceptions are interpreted restrictively, since severance pay pursues, as indicated above, an objective of social protection.
As a rule, severance pay becomes due upon termination of the employment relationship. However, its payment may be deferred if the parties so agree in writing or if such deferral is provided for in a standard employment contract or a collective employment agreement. The court may also order payment by instalments where the employer’s financial situation so justifies.
Finally, severance pay is subject to an essential coordination with occupational pension schemes. As noted above, severance pay primarily serves a pension-related purpose (ATF 115 II 30). In this respect, Article 339d CO enshrines the principle that severance pay is subsidiary to benefits provided by occupational pension institutions. Accordingly, where the employee receives second-pillar benefits financed in whole or in substantial part by the employer, such benefits may be deducted from the severance pay. In the same vein, the employer may be released from its obligation where it undertakes to finance equivalent pension benefits at a later stage or has such benefits insured by a third party. This coordination is intended to avoid double funding at the employer’s expense and to ensure consistency between severance pay and old-age benefits.
As a result, severance pay has lost much of its practical significance since the introduction of mandatory occupational pension insurance (second pillar) and full vesting. Occupational pension benefits may therefore be offset against the severance pay for long service relationships to the extent that they are financed by the employer (Article 339d paragraph 1 CO).
In addition, interest accrued on employer contributions may also be offset, since such interest is likewise financed by the employer under the law. Finally, premiums relating to risk insurance linked to occupational pension schemes should also be taken into account.
Taking into account the possibility of offsetting the employer’s contributions paid under the mandatory occupational pension scheme (Federal Act on Occupational Retirement, Survivors’ and Disability Pension Plans, LPP), severance payments for long service have become very rare in practice. Indeed, where the value of the occupational pension benefit exceeds the severance pay due, the latter is eliminated in its entirety.
Depending on the circumstances, a severance payment for long service may still be granted to employees with modest salaries, in particular part time employees whose income falls outside the coordinated or insured salary range pursuant to Article 7 paragraph 1 and Article 8 LPP, as well as Articles 3a and 5 OPP2.
When faced with a request from an employee to receive severance pay for long service, the employer must first determine the amount of severance pay that could potentially be owed under Article 339b CO.
From the amount of severance pay, the employee must allow the employer’s pension contributions paid since the beginning of the employment relationship to be offset. In the vast majority of cases, the cumulative amount of these contributions exceeds the maximum severance pay to which the employee could be entitled under Article 339b CO. Where this is the case, no severance pay for long service is due.
It should also be noted that if the employer terminates the employment contract in the ordinary manner shortly before the employee reaches the age of 50 or completes 20 years of service, with the intention of preventing the entitlement from arising, such dismissal may be considered abusive within the meaning of Article 336 paragraph 1 letter c CO. In such a case, the cumulative award of compensation for wrongful termination under Article 336a paragraph 1 CO and severance pay under Article 336a paragraph 2 second sentence CO should be possible.
Finally, Article 341 paragraph 1 CO provides that the employee may not waive the severance pay under Article 339b CO during the employment relationship or during the month following its termination, pursuant to Article 362 CO.
In determining the amount of severance pay, all the circumstances of the specific case must be taken into account. The scale developed in the Canton of Bern may serve as an indication, even though the Federal Supreme Court criticises the general and schematic application by courts of sector specific scales where the severance pay is not provided for in a written agreement, a standard employment contract or a collective employment agreement. By contrast, an internal company scale validly incorporated into written employment contracts would be permissible.
II) Severance pay and social security
A) Under the first pillar
From a social security perspective, insofar as severance pay does not qualify as compensation for abusive dismissal or unjustified immediate dismissal, it is generally subject to first-pillar social security contributions pursuant to Article 7 letter q of the RAVS. This provision states that, subject to exhaustively listed exceptions, “benefits paid by the employer upon termination of the employment relationship” form part of the contributory salary, a position confirmed by Federal Supreme Court decision ATF 126 V 221.
However, social benefits granted by the employer may be partially or entirely exempt from contributions under certain conditions, in particular where occupational pension coverage is insufficient (Article 8bis RAVS) or where the employee has been dismissed for operational reasons (Article 8ter RAVS). Such benefits may be paid upon termination of the employment relationship either in the form of annuities, for example bridging pensions, or as lump-sum payments, for example severance pay.
With regard to the first exception, namely social benefits in cases of insufficient occupational pension coverage, benefits granted upon termination of the employment relationship for all complete calendar years during which the employee was not covered by an occupational pension scheme (second pillar) are not included in the contributory salary, provided that they do not exceed one half of the minimum monthly old-age pension applicable at the time of payment.
As for the second exception, operational reasons include company closures, mergers and restructurings. A company restructuring exists where the conditions required for the occupational pension institution providing mandatory occupational pension coverage to be subject to partial liquidation under the Federal Act on Occupational Retirement, Survivors’ and Disability Pension Plans (LPP) are met, or where a collective dismissal is governed by a social plan. In such cases, benefits paid by the employer following termination of the employment relationship for operational reasons are excluded from the contributory salary up to an amount equal to four and a half times the maximum annual old-age pension.
It should be noted that the severance pay for long-term employment relationships within the meaning of Article 339b CO, paid to the employee, but not to surviving dependants pursuant to Article 339b paragraph 2 CO, forms part of the contributory salary for first-pillar AVS purposes.
B) From the perspective of unemployment insurance
From the perspective of social security law, the payment of severance pay may raise coordination issues with unemployment insurance benefits.
Under Article 11a of the Unemployment Insurance Act, loss of work is not taken into account as long as voluntary benefits paid by the employer cover the loss of income resulting from the termination of the employment relationship (para. 1).
The concept of “voluntary benefits” paid by the employer within the meaning of Article 11a of the Unemployment Insurance Act is defined negatively. It refers to benefits granted upon termination of employment relationships governed by private or public law that do not constitute salary claims or compensation within the meaning of Article 11 paragraph 3 of the Unemployment Insurance Act (Article 10a of the Unemployment Insurance Ordinance). In a broad sense, this includes benefits that exceed what the law provides at the end of the employment relationship, in particular severance pay intended to compensate for the consequences of job loss, as well as gratifications or retention bonuses. Such benefits may, for example, arise from a social plan or a collective labour agreement (Federal Supreme Court decision 4A_670/2010 of 4 April 2011). By contrast, voluntary benefits do not include salary paid during the notice period, compensation for unused vacation, overtime payments or compensation for abusive dismissal. It should be noted that whether voluntary benefits are considered contributory salary under old-age and survivors’ insurance legislation is irrelevant in this context.
According to the “Guide to the rights and obligations of unemployed persons” of the Canton of Geneva, discretionary severance pay is partially deducted from the loss of earnings taken into account by unemployment insurance and accordingly postpones the opening of the entitlement period, provided that it was paid in addition to the salary due during the notice period and that it does not constitute compensation for early termination of the employment relationship.
The entitlement period therefore begins on the first day on which the loss of work is taken into account and the insured person fulfils all other conditions giving rise to entitlement to unemployment benefits. In other words, severance pay defers the entitlement to unemployment benefits and the start of the entitlement period for a duration corresponding to the number of months of salary represented by the severance pay, subject to the adjustment mechanisms described below (Federal Supreme Court decision ATF 143 V 161).
The date on which the worker registers as unemployed has no impact on the running of this period, nor is it interrupted by taking up another activity.
As a reminder, the entitlement period generally covers the two years following the day on which the unemployment claim is filed and all conditions on which entitlement to benefits depends are fulfilled.
The entitlement period is extended by two years for insured persons who become unemployed within four years prior to retirement.
By contrast, the number of daily benefits granted during the entitlement period is not fixed. The maximum number of benefits depends on several factors, including age, the existence of dependent children and the number of months worked during which unemployment insurance contributions were paid. Different rules apply to recipients of disability insurance pensions and to persons exempt from the obligation to contribute.
Thus, for example, if the employee has paid contributions for at least 18 months during the two years preceding registration for unemployment, he or she may receive 400 daily unemployment benefits, corresponding to a period of 18 months. If the employee is aged 55 or over and has paid contributions for at least 22 months during the two years preceding registration for unemployment, he or she may receive 520 daily benefits, corresponding to a period of 24 months. This does not, however, affect the duration of the two-year entitlement period. Regardless of the number of daily benefits to which an unemployed person is entitled, these benefits are paid within the maximum two-year entitlement period. This period is extended by two additional years for persons who are less than four years away from retirement.
It should be noted that the maximum number of daily benefits may be reviewed and adjusted during the benefit period if the conditions governing entitlement change, such as the insured person’s age category, the existence of dependent children, or the granting of a disability pension. However, insured persons who reach the four-year threshold before retirement only during the framework period cannot benefit from the additional 120 daily benefits. The new situation is taken into account as from the beginning of the month in which it arises, for example from the beginning of the month in which the insured person turns 55.
It is important to note that voluntary payments made by the employer which give rise to a waiting period are taken into account only insofar as they exceed the maximum ceiling referred to in Article 3 paragraph 2 of the Unemployment Insurance Act, and after deduction of the amounts allocated to occupational pension provision. The relevant provisions are Article 10b of the Unemployment Insurance Ordinance and Article 8 paragraph 1 of the Federal Act on Occupational Retirement, Survivors’ and Disability Pension Plans, in conjunction with Article 5 of the corresponding ordinance. The maximum ceiling currently amounts to CHF 148,200 (art. 22 Accident Insurance Ordinance), while the coordinated salary referred to in Article 8 paragraph 1 of the LPP amounts to CHF 90,720. For further details, reference should be made to the applicable unemployment insurance directives.
By way of example, if Paul receives severance pay of CHF 300,000 and allocates CHF 100,000 to occupational pension provision, the calculation is as follows. From the amount of CHF 300,000, the maximum ceiling of CHF 148,200 and the coordinated salary of CHF 90,720 are deducted, resulting in an amount of CHF 61,080. The voluntary benefits to be taken into account by the unemployment insurance fund therefore amount to CHF 61,080.
In order to determine the duration of the waiting period, the amount of the voluntary benefits taken into account must be divided by the salary earned in the employment giving rise to those benefits. Thus, if Paul earned an average salary of CHF 20,000 during the six months preceding his dismissal, the calculation is CHF 61,080 divided by CHF 20,000, resulting in 3.054 months. The period during which the loss of work is not taken into account therefore amounts to 3.054 months. By converting 0.054 months into working days and rounding down to the nearest whole day, Paul’s loss of work is only taken into account three months and one working day after the end of the employment relationship.
Finally, it should be noted that the severance pay granted in respect of long-term employment relationships pursuant to Article 339b of the Code of Obligations is not considered a voluntary payment by the employer within the meaning of Article 11a of the Unemployment Insurance Act and therefore does not trigger the opening of a waiting period.
III) Taxation of severance pay
A) Application of the pension tax rate (separate taxation)
As a general rule, severance pay constitutes taxable income under both federal and cantonal tax law (Art. 23(a) or (c) of the Federal Direct Tax Act (FDTA); Art. 26(a) or (c) of the Geneva Cantonal Tax Act). It is normally taxed together with the taxpayer’s other income at the full applicable rate (Art. 36 FDTA; Art. 41 Geneva Cantonal Tax Act), unless it replaces periodic benefits within the meaning of Art. 37 FDTA (Federal Supreme Court decision ATF 145 II 2, paras. 4.1 and 4.2; decision 9C_237/2023 of 5 March 2024, paras. 4.1 and 4.2). An exception exists in particular where severance pay serves a pension-related purpose.
Pursuant to Art. 17(2) FDTA, “lump-sum payments from a pension institution in connection with dependent employment, as well as analogous lump-sum payments made by the employer, are taxable in accordance with Art. 38.” Art. 38 FDTA therefore provides for separate taxation at a reduced rate. Arts. 18 and 45 of the Geneva Cantonal Tax Act contain similar provisions.
By way of example, Paul receives severance pay of CHF 100,000 in 2026, while his other income amounts to CHF 50,000. If the conditions set out in Art. 17(2) FDTA are met, the severance pay is taxed separately in 2026 at one fifth of the ordinary tax rate, and this special taxation does not take Paul’s other income or assets into account. As a result, the progressive effect of the tax rate is neutralised.
However, the law does not precisely define what constitutes an “analogous” lump-sum payment comparable to benefits paid by a pension institution. Although the scope of application of this provision is therefore difficult to delineate, for example, it does not apply to lump-sum payments from a pension institution insofar as such payments constitute pension income within the meaning of Art. 22 FDTA or Art. 22 of the Geneva Cantonal Tax Act, it primarily targets lump-sum payments made by the employer to the employee upon termination of the employment relationship on a voluntary or contractual basis.
According to case law, lump-sum payments made by the employer upon termination of employment fall within the scope of Art. 17(2) FDTA only if their predominant purpose is to provide for the employee’s old-age pension (Federal Supreme Court decision of 19 August 2010, RDAF 2011 II 60, para. 4.5). This provision must therefore be interpreted in conjunction with legislation on occupational pension schemes. Whether such a link exists must be assessed in light of the circumstances surrounding the payment in question.
On 3 October 2002, the Federal Tax Administration issued Circular No. 1 on severance pay and lump-sum payments made by employers. According to this circular, severance pay has a pension-related character where it is intended exclusively and irrevocably to mitigate the financial consequences arising from risks related to old age, disability and death.
For example, severance pay granted voluntarily by the employer to the employee in order to enable the latter to remedy gaps in his or her occupational pension coverage resulting from the premature termination of employment may be treated as analogous. As a rule, the lump-sum payment must be made under circumstances comparable to those applicable to vested benefits paid by a pension institution.
Accordingly, for lump-sum payments made by an employer to benefit from the preferential tax treatment provided for in Article 17(2) FDTA, three cumulative conditions must be met (section 3.2 of Circular No. 1): the taxpayer leaves the company after having reached the age of 55 (lit. a); his or her gainful activity (principal occupation) is definitively terminated or must be terminated (lit. b); and a gap in pension coverage arises as a result of leaving the company and its pension institution (lit. c).
As regards the pension gap, it must be determined by the pension institution. Moreover, only gaps relating to the ordinary employer and employee contributions for the period between withdrawal from the pension institution and the ordinary retirement age, calculated on the basis of the previously insured salary, may be taken into account. A gap that already existed at the time of withdrawal from the pension institution is not relevant for the calculation (past gaps may be covered by employee buy-ins to the pension institution or by a direct payment by the employer to the pension fund prior to the termination of the employment relationship).
This assessment is therefore based on a forward-looking analysis at the time the entitlement arises or the payment is made and must consequently be carried out in advance.
With regard to severance pay, it is therefore necessary in each individual case to determine the portion required to cover the gaps resulting from the premature departure from the company.
It should be noted that the circular issued by the Federal Tax Administration merely constitutes an administrative guideline without the force of law; it is not binding on taxpayers, courts or even the administration itself. It cannot therefore be applied mechanically and does not relieve the authorities of their duty to take into account the specific circumstances of each individual case (ATF 145 II 2, para. 4.3; Federal Supreme Court judgment 2C_520/2019 of 1 October 2019, para. 3.3, with references). Imposing a minimum age therefore appears to be contrary to the spirit of the law, even if certain cantonal tax authorities rely on it.
Some cantonal tax authorities, such as those of the canton of Bern, also take the view that there is no definitive cessation of gainful activity if the taxpayer registers for unemployment insurance. This position likewise appears to conflict with the case law of the Federal Supreme Court (judgment of 19 August 2010, RDAF 2011 II 60, para. 4.5). According to the Court, the requirement of cessation of the principal gainful activity is met where, at the time the severance pay is paid, it is highly uncertain or unlikely that the beneficiary will find comparable employment. The employee should not be penalised for tax purposes if he or she subsequently manages to reintegrate into the labour market by accepting a lower-paid position (Federal Supreme Court, judgment of 19 August 2010, RDAF 2011 II 60, para. 7.2). In other words, the decisive factor is whether it is foreseeable that the employee will find comparable gainful employment (Federal Supreme Court judgment 9C_237/2023 of 5 March 2024). Registration for unemployment following the termination of employment should not, as such, be regarded as a continuation of the principal activity excluding the application of Article 17(2) FDTA.
With respect to the condition relating to the cessation of gainful activity, the Federal Supreme Court has held that the decisive point in time is when the severance pay is paid, and not an assessment made retrospectively (cf. Federal Supreme Court judgment 2C_538/2009 of 19 August 2010, para. 6.3).
In practical terms, when assessing whether the condition of cessation of gainful activity is met, the authority must base its assessment on the circumstances existing at the time the severance pay is paid and objectively evaluate the chances of finding new employment, taking into account in particular:
- the individual’s age,
- qualifications and hierarchical level,
- professional experience, and
- the absence of a declared intention to definitively cease gainful activity.
Subsequent steps taken by the taxpayer, even if unsuccessful, or later professional choices (such as setting up a self-employed activity) are not decisive for assessing the situation at the time the severance pay was paid.
As previously noted, principles derived from occupational pension law must be taken into account when calculating the amount. The severance pay must be comparable to benefits under the occupational pension scheme and must objectively serve to ensure that the beneficiary can adequately maintain his or her customary standard of living upon the occurrence of a pension contingency (old age, death or invalidity).
The employer is required to certify to the taxpayer the payment of severance pay, specifying its components and the purpose or purposes it is intended to serve.
Furthermore, the employer is obliged to provide the employee with the information necessary for the tax authorities and to supply the data required for an accurate assessment of the severance pay. The burden of proof lies with the employee.
The calculation of the portion of severance pay having a pension character and intended to cover a gap in pension coverage resulting from the premature departure from the company must be certified by the pension institution.
B) Taxation at the annuity rate (“spreading” over several tax periods)
If the conditions set out in Article 17(2) of the Federal Direct Tax Act are not met, taxation at the annuity rate may nevertheless be considered. Accordingly, where severance pay constitutes a lump-sum payment replacing periodic benefits that do not have a predominant occupational pension character, it may be subject to the special tax rate provided for in Article 37 of the Federal Direct Tax Act (Article 43 of the Geneva Tax Act), namely the rate that would have applied had an annual benefit been paid instead of a one-off payment. This is the case, for example, where an indemnity is paid as salary catch-up.
By way of illustration, Paul earned an annual salary of CHF 100,000 in 2025. He is dismissed at the end of 2025 and receives severance pay of CHF 200,000 in January 2026 to compensate for the loss of income over the following two years. His other income in 2026 amounts to CHF 20,000. The severance pay is fully taxed together with his other income for 2026. However, the applicable tax rate is the one that would have applied had the indemnity been paid in two instalments over two years. In 2026, Paul is therefore taxed on total income of CHF 220,000, consisting of his other income plus the full amount of the severance pay, at the rate applicable to income of CHF 120,000, corresponding to his other income of CHF 20,000 plus CHF 100,000, which represents the annual equivalent of the severance pay.
The law thus establishes a special system known as “taxation at the annuity rate” for lump-sum payments that are intended to settle a claim relating to periodic benefits, where the lump sum replaces a benefit originally owed in another form. Where a capital payment is made in respect of benefits that should have been provided in the past, such a system applies only if, by their nature, the benefits concerned would normally have been paid periodically, but were not paid independently of the beneficiary’s will. The purpose of this mechanism is to ensure that the tax burden applicable to lump-sum indemnities is not higher than that which would have applied had the periodic benefits been paid regularly, without the taxpayer having had any influence over the delay.
Capital payments are one-off inflows intended to extinguish an entitlement to periodic benefits. Employee shares and stock options, as well as bonuses, are not taxed under Article 37 of the Federal Direct Tax Act. Even where such benefits are paid on a regular basis only after one year of service with the same employer, they lack the character of income replacing periodic benefits.
Application of the annuity rate is excluded, according to the Swiss Federal Supreme Court, where a benefit is paid in the form of a single lump sum intended to compensate, at the parties’ discretion, for the loss of claims relating either to the past or to the future. Consequently, the annuity rate cannot be applied to severance pay or to compensation paid on account of long service (Arch. 70, 210 = RDAF 2002 II 1, 6, final part of consideration 4c).
According to a Federal Supreme Court judgment of 6 March 2001 (Arch. 71, 486 = RDAF 2001 II 253), a simple lump-sum compensation paid voluntarily by an employer to a 48-year-old taxpayer in the context of the termination of the employment relationship constitutes additional salary. As a result, preferential taxation under Article 17 paragraph 2 of the Federal Direct Tax Act does not apply. Since such compensation does not replace periodic benefits, “all the more so as it was not calculated on the basis of a capitalization of future pension benefits”, it is likewise not subject to taxation at the annuity rate under Article 37 (Arch. 71, 486 = RDAF 2001 II 253, 259 et seq., consideration 4b).
According to the tax authorities of the Canton of Berne, taxation at the annuity rate may be granted only if all of the following conditions are met. First, the employment relationship must be terminated after the employee has reached the age of 55. Second, the severance pay must correspond to a multiple of the employee’s annual professional income and, in any event, exceed one annual salary. Third, no new professional activity may be undertaken, or the income from any new professional activity must be significantly lower than the income previously earned. The annuity rate is not granted if the taxpayer is registered with the unemployment insurance fund as being available for placement.
In summary, the annuity rate applies to lump-sum payments that replace past or future periodic benefits which the beneficiary would have received had it not been for circumstances beyond his or her control. Typical examples include lump-sum payments replacing overdue pensions in the field of social security, maintenance contributions or salary arrears, provided that the periodic benefits should have been paid but were not paid through no fault of the creditor.
Article 37 of the Federal Direct Tax Act should therefore not apply to severance pay or to contractual compensation paid on account of long service. In such cases, the payments do not replace periodic benefits but constitute a one-off element of additional remuneration.
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