The current French income tax and social security legislation provides for a generous exemption on severance payments, which extends to the highest of:

- the amount provided for by law or the relevant collective bargaining agreement (if applicable),
- 50% of the severance payment received, and
- twice the annual gross remuneration received during the calendar year preceding dismissal.

However there is an absolute cap on the exemption at EUR 366.000 (income year 2005) should one of the latter two limits apply. The first limit (the amount provided for by law or the relevant collective bargaining agreement) is uncapped.

The French Finance Bill for income year 2006 provides for a reduction in the maximum exemption from EUR 366.000 to approximately EUR 182.000 should one of the latter two limits apply. This new (lower) absolute exemption should be applicable to severance payments paid on or after 1 January 2006. The first limit should remain uncapped.