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Severance: employer–employee separation and Swiss taxation
A severance payment of CHF 80,000 incurs CHF 33,200 in taxes in Geneva without prior structuring. Swiss law and quantified tax optimisation.
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Introduction
The series Severance, available on Apple TV+ and award-winning on Rotten Tomatoes, depicts a radical memory-based separation between professional and private life. The English word severance also refers, in employment law, to the departure package paid upon termination of a contract. It is this second meaning that concerns Swiss companies: a severance payment of CHF 80,000 made without prior structuring generates an immediate tax burden of CHF 33,200 in Geneva. What follows is a legal and fiscal overview of the end of an employment relationship under Swiss law.
Severance pay or wrongful dismissal compensation?
Under Swiss law, the Code of Obligations distinguishes between two separate regimes.
Compensation for wrongful dismissal is capped at six months' gross salary pursuant to Article 336a of the Code of Obligations (CO). It is awarded by a judge where the employer has not complied with the lawful grounds for termination. An executive remunerated at CHF 150,000 per annum may thus claim a maximum of CHF 75,000 under this heading.
The negotiated severance payment, known as a severance package, is governed by a contractual agreement freely entered into between the parties. It is subject to no statutory cap. Its amount results from the applicable collective labour agreement, the staff regulations, or a termination agreement signed by both parties.
The distinction is fiscally decisive: compensation for wrongful dismissal within the meaning of Article 336a CO is exempt from income tax up to the maximum statutory amount, pursuant to Article 24 letter i of the Federal Act on Direct Federal Tax (LIFD [Loi fédérale sur l'impôt fédéral direct]). Any amount exceeding this cap, or paid outside a judicial framework, is taxable as ordinary income, or even as extraordinary income depending on the canton. Compensation for wrongful dismissal provided for under Article 336a CO is tax-exempt up to six months' gross salary, i.e. CHF 75,000 for an annual income of CHF 150,000, pursuant to Article 24 letter i LIFD.
Taxation of a severance payment in Geneva and elsewhere
The tax treatment of a severance payment varies considerably depending on the canton of residence of the recipient.
In Geneva, the Cantonal Tax Administration (AFC-GE [Administration fiscale cantonale de Genève]) classifies taxable severance payments as extraordinary income. They are subject to separate taxation at the rate corresponding to one fifth of the amount, which slightly mitigates progressivity without eliminating it entirely. For a Geneva resident with an ordinary income of CHF 150,000, the effective marginal rate applied to a severance payment of CHF 80,000 is approximately 41.5%, representing CHF 33,200 in combined federal direct tax, cantonal tax, and municipal tax.
In Zurich, the same extraordinary income mechanism applies pursuant to paragraph 37 of the cantonal Steuergesetz. The effective rate is slightly lower, at around 38% for a comparable profile.
In Zug, the total tax burden falls to approximately 22% owing to the low cantonal rate, representing an additional CHF 15,400 retained compared with Geneva on an identical severance payment of CHF 80,000.
For employees subject to withholding tax (permit B holders or cross-border workers), the employer is required to deduct tax directly from the gross amount of the severance package at the time of payment, with no possibility of deferral. A subsequent adjustment is possible through the ordinary tax return if total annual income exceeds CHF 120,000.
Withholding tax on a severance payment made to a permit B holder applies at the time of payment, with no deferral possible, and adjustment via an ordinary tax return above CHF 120,000 in gross annual income.
Declaring a severance payment to limit the tax burden
Several lawful mechanisms allow the taxable base of a severance package to be reduced.
First lever: spreading the payment over two tax years. If the severance payment is split between December of year N and January of year N+1, the progression rate is mechanically reduced, provided that the termination agreement explicitly sets out this payment schedule. The Geneva tax authority accepts this splitting arrangement, subject to the payments corresponding to distinct and documented entitlements.
Second lever: the deduction of professional expenses related to job loss. Legal or tax advisory fees incurred in connection with the negotiation of the severance package are deductible as income-acquisition expenses, within the limits set by Article 26 LIFD.
Third lever: the buy-back into pillar 2, detailed in the following section. For tax returns relating to redundancy payments and cantonal income tax burdens, an individualised analysis conditions the effectiveness of each mechanism. To find out the tax treatment of your severance payment based on your situation, please consult our analysis on the taxation of severance pay for employees.
LPP buy-back and tax elimination
The purchase of shortfalls in occupational pension provision (pillar 2) constitutes one of the rare fiscal levers capable of substantially neutralising the impact of a severance package.
A dismissed employee may pay all or part of their severance payment into their pension institution in the form of a voluntary buy-back, within the limit of the contribution shortfall calculated by the institution. This buy-back is fully deductible from taxable income, pursuant to Article 33 paragraph 1 letter d LIFD.
On a severance payment of CHF 80,000, an LPP [Loi fédérale sur la prévoyance professionnelle vieillesse, survivants et invalidité] buy-back of CHF 50,000 eliminates approximately CHF 17,500 in taxes in Geneva, based on a marginal rate of 35% applied to the amount purchased. The remaining balance of CHF 30,000 is taxed normally.
The principal constraint: the three-year blocking period provided for under Article 79b paragraph 3 LPP. Any capital withdrawal within three years of a voluntary buy-back results in the full fiscal recovery of the deduction granted, retroactively cancelling the saving achieved. This period applies even in the event of departure abroad or early retirement.
An LPP buy-back of CHF 50,000 funded by a redundancy payment generates approximately CHF 17,500 in tax savings in Geneva, but the three-year blocking period set out in Article 79b paragraph 3 LPP renders any early withdrawal fiscally counterproductive.
The buy-back shortfall is certified by a document issued by the pension institution. This document must be attached to the tax return for the year of the buy-back.
Risks for the employer paying a poorly structured package
A severance package paid without an adequate contractual framework exposes the employer to three types of cumulative risk.
First risk: reclassification as salary. If the severance payment is not based on a signed termination agreement, the tax authority may reclassify it as ordinary remuneration subject to social security contributions AVS/AI/APG [old-age and survivors' insurance / disability insurance / income replacement allowances]. The additional employer contribution is 5.3% of the gross amount, to which are added the employee contributions not withheld, representing a total additional cost of up to 10.6% of the payment.
Second risk: failure to release LPP contributions. If the insured salary is not properly settled, the pension institution may claim contributions on the amount paid, with default interest.
Third risk: reclassification as a taxable benefit in kind for shareholder directors. For a director or dominant shareholder, a severance payment that is disproportionate relative to market practice may be reclassified as a concealed profit distribution, subject to the anticipatory tax [impôt anticipé] of 35% levied by the Confederation.
An employer paying a severance package without a signed termination agreement is exposed to reclassification as salary subject to AVS/AI/APG contributions, generating an immediate additional employer cost of 5.3% on the gross amount paid.
The termination agreement must specify: the reason for termination, the mutual waiver of any further claims, the payment schedule, and the tax classification agreed between the parties.
Practical case study: CHF 80,000 in Geneva after tax
Profile: executive resident in Geneva, ordinary annual gross income of CHF 150,000, dismissed with a severance package of CHF 80,000 paid outside any judicial framework.
Situation without structuring:
Gross amount of the severance payment: CHF 80,000
Tax classification: extraordinary income
Effective rate applied by the AFC-GE: 41.5%
Total tax (federal direct tax + cantonal and municipal tax): CHF 33,200
Net amount retained: CHF 46,800
Situation with an LPP buy-back of CHF 50,000:
Amount purchased into pillar 2: CHF 50,000
Corresponding tax deduction: CHF 50,000
Tax saving on the buy-back: CHF 17,500 (marginal rate 35%)
Remaining taxable balance: CHF 30,000
Residual tax on the balance: CHF 12,450 (rate 41.5%)
Total tax burden: CHF 12,450
Net amount retained (excluding blocked LPP capital): CHF 17,550 immediately available + CHF 50,000 in pension provision
Net saving compared with the unstructured situation: CHF 20,750
Mandatory condition: the LPP capital must not be withdrawn within three years of the buy-back, failing which the AFC-GE will fully recover the tax deduction.
If the splitting of the payment is also applied (CHF 40,000 in December of year N and CHF 40,000 in January of year N+1), the effective average rate falls to approximately 37%, generating an additional saving of CHF 3,600 compared with a single payment.
A Geneva-based executive receiving CHF 80,000 in severance pay without structuring retains CHF 46,800 net; with an LPP buy-back of CHF 50,000 respecting the three-year period, the tax saving reaches CHF 20,750 based on the AFC-GE 2026 tax scales.
"The information contained in this article is provided for purely informational purposes and does not constitute legal or fiduciary advice. Any personal situation requires the opinion of a qualified professional. Fiduciaire Genevoise accepts no liability for the use of this information."
FAQ
No. Compensation for wrongful dismissal awarded by a judge pursuant to Article 336a CO is exempt from tax up to six months' gross salary under Article 24 letter i LIFD. Any contractually negotiated payment beyond this framework is, however, taxable as ordinary or extraordinary income depending on the canton of residence.
For a Geneva resident with an ordinary income of CHF 150,000, a taxable severance payment of CHF 80,000 is subject to an effective rate of approximately 41.5% as extraordinary income, representing a combined federal direct tax and cantonal and municipal tax burden of CHF 33,200 based on the AFC-GE 2026 tax scales.
A severance package paid to a shareholder director must be proportionate to market practice. A payment deemed excessive may be reclassified as a concealed profit distribution by the tax authority, resulting in an anticipatory tax of 35% levied by the Confederation on the amount considered a disguised dividend.
Yes, provided the employee remains affiliated with a pension institution or joins a vested benefits institution. The buy-back must be made within the limit of the contribution shortfall certified by the institution. The deduction is full pursuant to Article 33 paragraph 1 letter d LIFD, but the three-year blocking period provided for under Article 79b paragraph 3 LPP applies without exception.
No, unless a collective labour agreement (CCT [convention collective de travail]) or staff regulations provide for a severance payment to the contrary. In the absence of such instruments, no statutory provision obliges a Swiss employer to pay a severance payment beyond the salary owed up to the end of the contractual or statutory notice period.
The employer deducts withholding tax at the time of payment, with no possibility of deferral. If total annual income exceeds CHF 120,000, the employee may request a subsequent ordinary tax assessment enabling deductions to be claimed, including an LPP buy-back, in accordance with the rules applicable in the canton of residence.
Élodie Rochat
