Severance Payments: Legal Framework and Tax Exemptions
In France, payments made upon dismissal benefit from a specific tax regime designed to protect the employee while limiting the tax burden. According to Article 80 duodecies of the General Tax Code, legal or contractual severance payments are exempt from income tax within certain limits.
For the year 2024, the exemption applies to amounts below the highest of the following three values:
The legal or contractual amount of the severance payment,
Twice the employee’s gross annual salary received during the year preceding the dismissal,
A fixed ceiling of €246,816 (i.e., 305 times the gross hourly minimum wage, set at €11.52 in 2024).
Amounts exceeding these thresholds are taxable as ordinary income. Furthermore, these payments are exempt from social security contributions but remain subject to the CSG and CRDS at a combined rate of 9.7% (source: Official Bulletin of Public Finances - BOFiP, 2024).
Mutual Termination: Exemptions Identical to Severance Payments
The mutual termination, an amicable termination of the employment contract, entitles the employee to a specific indemnity. This indemnity, at minimum equal to the legal severance payment, benefits from the same tax regime as severance payments.
Specifically, the mutual termination indemnity is exempt from income tax within the previously stated limits, namely:
Criterion
Amount or Limit
Legal or contractual indemnity
Variable depending on seniority, for example 1/4 month per year of seniority for the first 10 years, then 1/3 thereafter (Labor Code, Article L1234-9)
Twice the gross annual salary
Example: if annual salary is €40,000, limit = €80,000
Legal maximum ceiling
€246,816 (305 x gross hourly minimum wage)
Amounts exceeding these limits are subject to income tax and social contributions (excluding CSG/CRDS already deducted). This exemption also applies to indemnities paid under an approved voluntary departure plan (VDP).
Immediate Availability of Exempt Amounts and Impact on Savings
Exempt indemnities, whether from dismissal or mutual termination, are generally paid in a lump sum and immediately available. This liquidity allows the beneficiary to access these funds without delay, unlike other employee savings schemes subject to blocking periods.
However, it is advisable for the former employee to optimize the use of these funds by directing them towards suitable investments, particularly to secure their financial future. The Retirement Savings Plan (PER) is an attractive option, offering significant tax advantages.
Investing Exempt Indemnities in a Retirement Savings Plan (PER)
The individual PER allows voluntary contributions to be deducted from taxable income, within an annual ceiling of 10% of the previous year’s professional income, with a maximum of €32,909 for 2024 (source: INSEE, updated 2023 data).
By contributing all or part of the exempt indemnity to a PER, the employee can reduce their income tax for the year of contribution while preparing for retirement. Funds remain locked until retirement, except in cases of early release (purchase of primary residence, disability, death, etc.).
Example: an employee dismissed with an exempt indemnity of €50,000 may choose to contribute €30,000 to a PER. This amount will be deducted from their taxable income, potentially resulting in significant tax savings depending on their marginal tax rate (MTR).
Voluntary Departure Plans (VDP): Terms and Exemptions
VDPs, often implemented in large companies undergoing restructuring, allow employees to leave voluntarily with a specific indemnity. These indemnities benefit from the same exemptions as severance and mutual termination payments, within the aforementioned limits.
Moreover, indemnities paid under a VDP may be accompanied by a dedicated savings scheme, such as the Collective Retirement Savings Plan (PERCO) or a company PER, enabling optimized management of the funds.
Comparative Summary of Tax and Social Security Exemptions
Type of Indemnity
Income Tax Exemption
Social Security Contributions Exemption
CSG/CRDS
Immediate Availability
Legal Severance Payment
Yes, within legal limits (up to €246,816)
Yes, except CSG/CRDS
Yes, at a combined rate of 9.7%
Yes
Mutual Termination Indemnity
Yes, same limits as severance
Yes, except CSG/CRDS
Yes, 9.7%
Yes
Voluntary Departure Plan Indemnity
Yes, same limits
Yes, except CSG/CRDS
Yes, 9.7%
Yes
Conclusion and Recommendations for French Investors
For employees affected by dismissal, mutual termination, or a voluntary departure plan, it is crucial to fully understand the applicable tax exemptions on received indemnities. These indemnities are exempt from income tax within specific limits, exempt from social security contributions but subject to CSG/CRDS.
It is advisable to leverage the immediate availability of these funds to optimize one’s assets, notably through contributions to a Retirement Savings Plan (PER), which offers additional tax benefits while preparing for retirement. This strategy suits taxpayers in higher marginal tax brackets.
Finally, in the case of a voluntary departure plan, it is important to verify associated savings schemes, often advantageous, and consult a financial advisor for personalized allocation. Vigilance regarding exemption ceilings and the nature of indemnities is essential to avoid any unexpected tax issues.
Sources: BOFiP (2024), INSEE (2023), Labor Code, Banque de France, Bloomberg.
