France is revising its rules on severance pay, which are payments made to employees when their employment ends, whether through dismissal or voluntary departure. These payments often include compensation for lost wages, benefits, and other damages. The current system provides exemptions from income tax and social contributions, but these exemptions depend on the type of termination, the employee’s salary, and the nature of the compensation. For example, payments awarded by the court in cases of unfair dismissal are fully tax-free, while other payments, such as those from employment safeguard plans (PSE), are also exempt up to certain limits. Under the current system, the tax-free portion of severance payments is excluded from social security contributions up to two PASS (a unit of calculation based on the average annual salary). However, any amount exceeding ten PASS is fully taxable, with lower thresholds for company directors. The employer also pays a 40% contribution on the portion of payments that are exempt from social contributions. The Court of Cassation, France’s highest court for civil matters, has ruled that sums intended to compensate for specific harms, such as job loss, are entirely exempt from contributions. Employers must prove that such payments are for compensation, not salary. The proposed changes, outlined in the 2027 budget law (PLF), aim to simplify the tax and social contribution rules for severance payments. The new system would set a single tax ceiling of one PASS, meaning that any amount exceeding this threshold would be taxable. This applies to all types of severance payments, including those from court orders, PSE, and collective dismissals. The previous rules based on salary or legal compensation amounts are being replaced with this single limit. The tax exemption for company directors is also being reduced from three PASS to one PASS. However, the text does not clarify whether this one PASS limit applies to each type of payment or to the total amount received from a single termination. The proposed changes also affect social contributions and CSG (a tax on income and social security contributions). A single ceiling of one PASS will apply to these contributions, regardless of the tax treatment of the payments. This means that the portion of severance payments exceeding one PASS will be subject to these taxes. The government estimates that this change will generate 0.3 billion euros in additional revenue. However, the reform has faced criticism, as both employee and employer lawyers argue that it increases the burden on workers rather than simplifying the system. The change may disproportionately affect older employees and managers, who typically receive higher severance payments.