Taxation of Settlement Contract
With the provision added to the article 25 of the Income Tax Law No: 193 to be effective as of 27.03.2018 under Law No. 7103, published in the 2. Reiterated Official Gazette No. 30373 dated 27 May 2018, the taxation of job loss indemnity, severance pay, job security indemnities to be paid in mutual termination of labor contracts and mutual rescission resulting from resignation, retirement, or not bringing an action against the employer have been clarified.
As it is known, all the severance payments that have to be paid according to the Labour Law have been excluded from income tax with the provision of Article 25. However, since the annual amount of severance payment cannot exceed the maximum retirement allowance to be paid for a year of service to a civil servant of the highest seniority of the Civil Servants Law, the severance payments exceeding this limit ("Severance Payment Ceiling") were levied.
However, even though the indemnities that were not legally severance payment and paid due to a mutual rescission were not covered by this article, the amount corresponding to the severance payment calculated according to the Labour Law of these payments was exempted from income tax under the rulings of the Revenue Administration. In other words, the tax administration admitted that such payments even though not legally considered as severance payment under the Labour Law are severance payments from an economical point of view and such payments were considered as a severance payment in terms of taxation.
The newly introduced provision conveys the same approach to the Law. As explained in article 11 of the General Communiqué on Income Tax No. 303 published on 11.06.2018, compensations paid under mutual termination or mutual rescission shall be taken into consideration in calculation of the exemption amount related to severance payment and the exemption shall be applied on the sum of the payments, the amounts exceeding the exemption limit shall be subject to income tax.
In other words, in the case of an additional payment of indemnity mentioned above except for the severance payment, the sum of this payment amount and the severance payment amount’s non-exceeding part of the maximum retirement allowance to be paid for a year of service to a civil servant of the highest seniority shall be subject to this exemption. On the other hand, the severance payment ceiling to be applied (for each service year) in the second half of 2018 is TL 5.434,42 effective from 01.07.2018.