Employment Termination Payments (EFPs) are lump sum payments made to employees on the termination of their employment contract.

Firstly payments made to departing employees essentially fall into 3 different categories;

(1) Statutory Redundancy,

(2) Ex-gratia Termination Payments, and

(3) payments made on foot of a legal obligation, e.g. a payment required via the Employee’s employment contract.

In general, any payments falling into the third category (i.e. non-ex-gratia payments) are taxable in full and are effectively treated the same as a bonus for PAYE/PRSI purposes. The Tax Reliefs and Exemptions available for termination payments only apply to payments falling within the first two categories.

However the European Commission has today officially asked Ireland to amend its legislation arguing that the rules lead to a higher tax burden for individuals who work in another member state for an Irish company. According to the Commission, the law as it stands is contrary to the free movement of workers and failure to comply will lead to the matter being referred to the European Court of Justice. As it stands, to compute the tax relief on such payments Irish law takes into account only the number of years service for the company while in Ireland and it does not take into consideration the number of years service in the same company based in other member states.

It will be interesting to see how this unfolds!