Relaxation of RVU Penalty Tax: Temporary Exemption from RVU Tax

Attention Entrepreneurs with Older Employees! On January 1, 2021, the "Law on Lump Sum Payments, RVU, and Leave Savings" came into effect. Part of this law includes a temporary exemption from the RVU penalty tax (early retirement scheme). This allows you to make agreements with your employees to stop working earlier without having to pay the penalty tax on early retirement arrangements. How does the RVU penalty tax work? When does it apply? And what changes have been made as of January 1, 2021? This blog provides the answers.

What is an RVU and When Does it Apply?

RVU stands for Regeling Vervroegde Uittreding (Early Retirement Scheme), a fiscal penalty tax. This comes into play when an employer financially helps an employee to retire earlier, or if this is the (often unintended) result of a mutually agreed exit arrangement. This typically applies to older employees. The exit arrangement involves offering a bridging allowance until the pension date, which can be done in various ways, such as through a severance payment, a waiting allowance, or even a work exemption with continued salary payment. This often arises from a negotiation process between the employer and the employee about ending the employment relationship. It is also sometimes driven by a noble intention to allow employees who are performing strenuous work to retire without burning out. However, this comes with the downside of having to pay a 52% penalty tax on the severance pay. This situation is particularly harsh during a company reorganization driven by financial difficulties, where older employees are the ones most likely to use the "voluntary and place-holder scheme" shortly before their pension age.

Supreme Court Ruling

This situation led to the Supreme Court ruling on June 22, 2018, where it clarified that what matters is whether the payments or benefits are intended to bridge or supplement the employee's income until the pension date. The main criterion is whether the dismissal is related to age or not. For example, a dismissal that occurs due to underperformance or a broken working relationship would not be age-related.

Tax Authority

The tax authority then developed a policy and an RVU test. According to this test, an exit arrangement qualifies as an RVU when it is clear that (simplified) the dismissal is age-related—i.e., the scheme's purpose is to enable older employees to retire earlier—and the severance pay, combined with other benefits, results in an income that is 70% of the last earned salary. Importantly, this 70% test also includes the unemployment benefit (WW). If the employee receives this severance pay within 24 months before reaching their pension or AOW age, an RVU is triggered, and the employer must pay a 52% penalty tax on the severance pay.

Easing of RVU Penalty Tax

Starting on January 1, 2021, there has been a relaxation of the RVU penalty tax. This relaxation is temporary and will last until December 31, 2025. Employers no longer owe RVU penalty tax if the exit arrangement includes:

One or more payments in the 36 months immediately preceding the employee’s AOW (state pension) age.
The total amount of these payments does not exceed €1,767 multiplied by the total (rounded up) number of months between the first payment and reaching AOW age.

However, most exit arrangements involve a lump-sum payment. The relaxed RVU penalty tax applies to lump-sum payments as long as the total amount does not exceed €63,000 gross (calculated as 36 x €1,767).

This does not mean that payments above €63,000 are prohibited. For example, if the employer offers a severance payment of €75,000, only the excess amount would be subject to the penalty tax, which would be limited to €6,240.

Additional Changes in the Law

The "Law on Lump Sum Payments, RVU, and Leave Savings" also includes an expansion of the tax-free leave savings option, allowing employees to retire earlier or take a sabbatical. Additionally, employees will be allowed to withdraw up to 10% of their accrued pension value as a lump sum. However, this part of the law will come into effect later, likely in 2023.

Conclusion

The new "Law on Lump Sum Payments, RVU, and Leave Savings" makes it easier to avoid the RVU penalty tax when terminating the employment of older workers. Exemption from the RVU penalty tax is possible for a severance payment up to €63,000 in a 36-month period.