Is the Indemnity for Not Re-Engaging to Work Subject to Income Tax?

The conclusion of this opinion letter can be summarized as below:

• The not re-engaging indemnity payments after the termination under the mandatory mediation process would be exempt from income tax.
• However, if the related amounts are paid under the voluntary mediation process before the termination, these amounts would be exempt from income tax up to the amount of the applicable severance cap. And the exceeded amount would be subject to income tax.

The details of this opinion letter are as below:

Per the section about the taxation and exemption processes of the indemnities paid to the employees located in the Income Tax General Communique no: 303:

The indemnities determined on the mediation agreements, job loose indemnity, termination indemnity, job security indemnity, etc., can be made to the employees. And, per Article 25 of the Income Tax Law, the severance cap amount would need to be considered during the payment processes. So, the amounts up to the severance cap amount can be exempt from income tax, and the exceeded amount would be subject to income tax.

Per the section about the exemption process of the indemnity payments located in the Income Tax General Communiqué No. 306:

The indemnities determined on the mediation agreements with a maximum of 8 months wage and paid to the employees not to re-engage to work after the termination would be exempted from income tax.

Per Articles 20 and 21 of Labor Law No. 4857;

Per Article 20, the employee who alleges that no reason was given for the termination of his employment contract or who considers that the reasons shown were not valid to justify the termination shall be entitled to apply for a mediator within one month of receiving the notice of termination.

Per Article 21, if the court or the mediator concludes that the termination is unjustified because no valid reason has been given or the alleged reason is invalid, the employer must re-engage the employee in work within one month. If, upon the employee's application, the employer does not re-engage him in work, compensation to be not less than the employee's four months' wages and not more than his eight months' wages shall be paid to him by the employer.

Based on the above statements, the conclusion of the opinion letter would be as below:

1. The indemnity amount up to a maximum 8 months wage paid to the employee not to re-engage to work on the mediation agreements after the termination would be exempt from income tax per Article 25 of the Income Tax Law.
2. However, if a voluntary mediation process is preferred before the termination to discuss the termination conditions and termination payment package, the indemnities on this voluntary mediation agreements agreed before the termination would be exempt from taxation up to the amount of applicable severance cap. The exceeded amount would be subject to Income tax.

You can reach the opinion letter of the Turkish Revenue Administration via the link (In Turkish.)

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