Severance Pay

Set a predefined earnings type ODP for severance pay. In payroll preparation enter the amount from which contributions and taxes are not accounted (based on the Decree on reinbursement amounts for work-related expenses and receipts recognised as expenses in the determination of the taxable base).

Below you can see an example of use:

Explanatory notes by DURS (Tax Administration of the Republic of Slovenia) on the amount of severance pay and the corresponding tax:

Explanatory notges by DURS (Tax Administration of the Republic of Slovenia), No. 4219-9/2006, 24 April 2006

VAT registered persons are confronted with many issues such as income tax prepayment and payment of social security contributions on severance pay which must be made on termination of employment contract for business reasons. Below you can see explanatory notes concerning this:

On termination of employment contract for business reasons, the employer must make severance pay out to the employee according to the provision of Article 109 of the Employment Relationship Act (ZDR, Offical Journal of the Republic of Slovenia, No 42/02). in addition you have to observe provisions of the Personal Income Tax Act (ZDoh-1, Official Journal, No 21/06 - UPB3) and Social Security Contributions Act (ZPSV, Offical Journal of the Republic of Slovenia, No. 5/96, 34/96, 3/98, 81/100 and 97/01) regarding severance pay tax.

Taxation according to the Personal Income Tax Act (ZDoh-1).

In accordance with item 8 of the first paragraph of Article 31 of the Personal Income Tax Act (ZDoh-1), severance pay is not included in tax base on labour compensation after termination of employment contract. That is, the right arising from employment relationship and amount is specified in the contract as stated in the Employment Relationship Act. The employer is obliged to provide severance pay on the basis of Article 109 of the Personal Income Tax Act. The severance pay cannot exceed ten average monthly salaries of the Republic of Slovenia (as stated by the Statistical Office of the Republic of Slovenia the average monthly salary amounted to 1157.58 EUR (277,403 SIT) in February 2006). This does not include payment of severance pay to the employee for whom employment contract was just concluded, or severance pay due to the associated person. Should the employer pay the amount which exceeds non-taxable amount, the surplus amount is calculated to the labour compensation base.

Considering all the above-mentioned things, non-taxable amount of severance pay is smaller than the following two amounts:

•  severance pay to which an employee is entitled according to the second paragraph of Article 109 ot the Employment Relationships Act,

•  ten average monthly salaries of the Republic of Slovenia.

The difference between paid amount and non-taxable amount is taxed for severance pay which is greater than the non-taxable amount.

Article of the Employment Relationships Act:

e) Severance pay

109. Article 109

(severance pay)

(1) The employee whose employer terminates the employment contract due to business reasons or due to incompetence is entitled to severance pay. The monthly average salary for the last three months before termination (actual or promised payment) is calculation base for severance pay.
    (2) The emplyoee is entitled to severance pay in the amount of:
    – 1/5 of the aforementioned base for each year he or she worked after having worked for 1 to 5 years;
    – 1/4 of the aforementioned base for each year he or she worked after having worked for 5 to 15 years;
    – 1/3 of the aforementioned base for each year he or she worked after having worked for more than 15 years.
    (3) Work for predecessors in title counts for work for employer.
    (4) The amount of severance pay must not exceed 10 times the base amount from the first paragraph of Article if not stated otherwise in collective agreement.
    (5) In accordance with the composition procedure the employee and employer can reach an agreement about method and type of payment or reduction of severance pay as stated in the second paragraph of the Article, should this pose threat to multiple positions of employment.