Tax aspects of severance pay in case of termination of a fixed-term employment contract

Following the adoption of the new Employment Relationships Act (ZDR-1) in 2013, the provisions regulating the conclusion of a fixed-term employment contract were amended. As one of the main advantages for employees, severance pay was introduced in case of termination of a fixed-term employment contract if the worker does not continue working for the same employer for an indefinite period of time. Pursuant to the applicable Employment Relationships Act (ZDR-1), such employees are likewise entitled to a severance pay. Although almost one year has passed since the new regulation was adopted, the question still arises, in practice, as to how the severance pay should be taxed in case of termination of a fixed-term employment contract.

In case of termination of an employment contract concluded for a fixed term of one year or less, the employee shall be entitled to receive a severance pay in the amount of 1/5 of the basis of assessment and in case of termination of an employment contract concluded for a longer period of time, the employee shall be entitled to receive a severance pay in the amount of 1/5 of the basis of assessment, increased by the proportionate part of the severance pay for each month of work. As opposed to severance pay in case of cancellation of an employment contract due to business reasons or for reasons of incapacity, at first the whole amount of the severance pay, in case of termination of a fixed-term employment contract, was subjected to payment of contributions and taxes.

Despite the adoption of the above provisions, the amendment to the Personal Income Tax Act was adopted as late as on 1 January 2014, stipulating that such severance pay paid out in accordance with the provisions of the Employment Relationships Act (ZDR-1) should likewise not be subjected to tax. In the case of termination of a fixed-term employment contract, the severance pay is not subjected to tax only to the amount envisaged in the provisions of the Employment Relationships Act (ZDR-1), or maximally to the amount of three average monthly wages in the Republic of Slovenia. As is the case also for severance pay, in case of termination of an employment contract for an indefinite period of time, a higher severance pay may be paid out, meaning that the difference between the paid-out amount and the statutory defined non-taxed amount will be subjected to tax.

As evident from the explanation of the Tax Administration of the Republic of Slovenia no. 4210-4305/2014-1 of 25 April 2014, it has been envisaged that in order to avoid any circumvention of tax regulations, only the first severance pay for the employee with a certain employer will not be subjected to tax. This means that the severance pay due to termination of each subsequent fixed-term employment contract with the same employer or an employer, which is a related entity of that employer, will be fully taxed.