Full-rate taxation of a termination payment made by the employer in case of restructuring: no close connection with occupational pension provision (DFTA 2004)

Facts

Subject matter and procedure: Public law appeal by the Federal Tax Administration (appellant) against the judgment of the Cantonal Court of the canton of Vaud, Administrative and Public Law Division, of 1 May 2019 (FI.2018.0287), concerning the federal direct tax (DFTA) for the 2004 tax period. The respondent is the taxpayer, represented by a fiduciary firm.

Factual background: The respondent had been a member of the management of the company [C. SA] ([C.] group) since 22 December 1986, in particular responsible for human resources and legal affairs. Following an internal restructuring, she was dismissed from her management position with effect from 28 February 2004, at the age of 57. The company paid her two net indemnities of CHF 237,000 and CHF 68,000, and reassigned her from 1 March 2004 to a position within [D. SA] , for the [C.] Foundation, with a salary reduction of about one half (from approximately CHF 14,300 net per month in 2003 to approximately CHF 7,400 net per month in 2004). Her reintegration into [C. SA] in 2006 preceded the end of the contract on 30 April 2008.

Declaration and assessment: The spouses declared the two benefits as lump sums, requesting their separate taxation as a payment analogous to an occupational pension institution for the indemnity of CHF 237,000. The assessment decision of 27 February 2006 taxed the income at the full rate. Upon objection, the Cantonal Tax Administration applied a reduced rate (half of the indemnity taken into account for the rate), which led to a DFTA of CHF 45,297.30.

Cantonal decision: The Cantonal Court partially upheld the respondent's appeal, annulled the decision on objection and remitted the file to the Cantonal Tax Administration to tax the indemnity of CHF 237,000 as a lump-sum payment analogous to an occupational pension institution. The sum of CHF 68,000 was confirmed as ordinary income.

Conclusions of the Federal Tax Administration: It requests that the indemnity of CHF 237,000 be taxed at the full rate together with the other income, in accordance with the assessment decision of 2006, and that it be found that this amount is not a payment analogous to an occupational pension institution (art. 17 para. 2 DFTA). In the alternative, it requests that the case be remitted to the Cantonal Court.

Positions of the parties: The respondent concludes that the principal conclusions are inadmissible (prohibition of reformatio in peius) and, for the remainder, that the appeal be dismissed. The Cantonal Tax Administration joins the conclusions of the appeal. The Cantonal Court waives submitting observations.

Considerations

Admissibility: A remittal judgment is in principle an interlocutory decision, but it is treated as a final decision in tax matters where the assessing authority has no margin of discretion (ATF 138 I 143 consid. 1.2). This is the case here, as the Cantonal Tax Administration must simply tax the indemnity in accordance with the directives of the Cantonal Court. The Federal Tax Administration's standing to appeal derives from art. 89 para. 2 let. a FSCA in connection with the OrgO-FDF. The appeal is therefore admissible.

New conclusions and reformatio in peius: Reformatio in peius is excluded before the Federal Supreme Court (art. 107 para. 1 FSCA). However, federal authorities are not bound by restrictions on the subject matter of the dispute that arose in cantonal proceedings (ATF 113 Ib 219), subject to respect for the respondent's right to be heard (art. 29 para. 2 Cst.). In DFTA matters, this practice applies (art. 103 para. 1 let. d, 131 para. 3 and 143 para. 2 DFTA). The respondent having been able to submit observations, the conclusion seeking taxation in accordance with the first assessment decision of 2006 is admissible.

Legal framework for privileged taxation: In principle, termination indemnities are taxable at the full rate as income (art. 16, 17 para. 1, 23 let. a and c, 36 DFTA). Art. 17 para. 2 DFTA provides an exception, namely separate taxation at a reduced rate (art. 38 DFTA) for payments analogous to occupational pension lump-sum benefits. According to settled case law, such payments must have a predominantly pension-related character, that is, a close connection with occupational pension provision, assessed in light of the circumstances (ATF 145 II 2 consid. 4.2). Circular No. 1 of the Federal Tax Administration of 3 October 2002 sets out three cumulative conditions (age of 55, definitive abandonment of gainful activity, pension gap), but it is merely a directive without force of law, which does not dispense with taking the concrete circumstances into account.

Application to the case (objective connection): The Federal Supreme Court cannot follow the assessment of the Cantonal Court. Admittedly, the loss of the position may have compromised pension expectations, but any termination indemnity aims to compensate for the loss of advantages linked to the position, including pension provision, so that this element alone is not sufficient to establish a close connection. Above all, the indemnity was agreed in an out-of-court settlement coupled with immediate reassignment: the respondent was never without employment, remained affiliated with a…