In brief: Severance payments made upon departure (dismissal, early retirement, resignation) are subject to distinct IR tax rules. The legal dismissal compensation (Art. 53 of the Labour Code) together with damages awarded upon dismissal are exempt up to a global cap of 1,000,000 MAD (Art. 57-7 GTC). The excess is taxable under the progressive scale, with the option to choose spreading over 4 years or the average rate system. Since 1 January 2026, pensions paid by the basic schemes (CNSS, CMR, RCAR) and by the CIMR are fully exempt from IR; the 70%/40% allowance only remains for pensions outside the scope of this exemption (foreign pensions, private supplementary pensions).
Dismissal Compensation: The Exemption Regime (Art. 57 GTC)
Principle: Exemption Within the Global Cap of 1,000,000 MAD
Article 57-7 of the GTC provides that the legal dismissal compensation (Article 53 of the Labour Code), the voluntary departure allowance and any damages awarded upon dismissal are exempt from IR, up to a global cap of 1,000,000 MAD (introduced by the 2023 Finance Law). Where several of these allowances are combined, the total exempt amount may never exceed this cap.
The legal severance pay (LSP) provided by Article 53 of the Labour Code is calculated as follows:
| Seniority | Compensation Per Year |
|---|---|
| First 5 years | 96 hours of salary |
| From 6 to 10 years | 144 hours of salary |
| From 11 to 15 years | 192 hours of salary |
| Beyond 15 years | 240 hours of salary |
This legal compensation is exempt from IR, as are damages awarded by court judgment or by a conciliation agreement (scale of Article 41 of the Labour Code: 1.5 months of salary per year of seniority, capped at 36 months). The exemption nonetheless remains capped at 1,000,000 MAD across all types of allowances combined: if the total compensation paid is less than or equal to this cap, it is fully exempt from IR.
Taxable Portion of Dismissal Compensation
The portion of the dismissal compensation that exceeds the 1,000,000 MAD exemption cap is subject to IR under the progressive scale. However, the taxpayer may opt for mechanisms that mitigate the progressivity of taxation (see section below).
Worked Example
A senior executive is dismissed and receives total compensation (legal severance and damages) of 1,200,000 MAD.
| Element | Calculation | Amount (MAD) |
|---|---|---|
| Total compensation paid | — | 1,200,000 |
| Exemption cap (Art. 57-7) | — | 1,000,000 |
| Taxable portion | 1,200,000 − 1,000,000 | 200,000 |
The sum of 200,000 MAD will be subject to IR under the progressive scale or will benefit from mitigation options. Where the total compensation remains below 1,000,000 MAD, the exemption is full.
Voluntary Departure and Early Retirement Compensation
Voluntary Departure (Art. 57)
Compensation paid as part of a voluntary departure benefits from the same exemption regime as dismissal compensation: exemption up to the global cap of 1,000,000 MAD (Art. 57-7 GTC). The excess portion is taxable under the progressive scale.
Departure for Economic Reasons (Art. 57-7)
Compensation paid as part of a social plan or economic restructuring benefits from exemption under specific conditions. The social plan must be approved by the competent government authority, and the compensation must be paid in accordance with collectively negotiated provisions.
Early Retirement
Compensation paid upon early retirement follows the same tax treatment as dismissal compensation: exemption up to the global cap of 1,000,000 MAD, taxation of the excess under the progressive scale.
Retirement Pensions: Exemption and Taxation (Art. 57/60 GTC)
Since 1 January 2026 (2026 Finance Law, Art. 57/28-III of the GTC), pensions paid by the basic retirement schemes (CNSS, CMR, RCAR) and by the CIMR are fully exempt from IR. A retiree receiving only a pension from these schemes therefore bears no IR on that pension, whatever its amount.
Applicable Allowances (pensions outside the scope of the exemption)
The allowance on pensions only remains for pensions not covered by the above exemption, for example foreign-source pensions or private supplementary pensions outside the listed schemes. For these pensions, the allowance applies as follows:
| Annual Pension Bracket (MAD) | Allowance Rate |
|---|---|
| Up to 168,000 | 70% |
| Above 168,000 | 40% |
Thus, for a foreign pension of 200,000 MAD per year (outside the scope of the exemption):
| Element | Calculation | Amount (MAD) |
|---|---|---|
| Allowance on 168,000 MAD (70%) | 168,000 × 70% | 117,600 |
| Allowance on excess (40%) | 32,000 × 40% | 12,800 |
| Taxable base | 200,000 − 117,600 − 12,800 | 69,600 |
The taxable base of 69,600 MAD will be subject to the progressive IR scale, resulting in very moderate IR thanks to the allowances.
Early Surrender of Retirement Insurance (Art. 73-II-C-5)
The surrender of a retirement insurance contract before maturity is subject to a 15% withholding tax as a final levy. This rate applies to the gross surrender amount and releases the taxpayer from any additional filing obligation for this income.
Resignation Compensation: Tax Regime
Unlike dismissal and voluntary departure compensation, compensation paid upon resignation does not benefit from any specific exemption under Article 57 of the GTC.
Contractual or conventional compensation paid to the resigning employee is therefore fully subject to the progressive IR scale, in the same way as additional salary. It is added to the salary income of the payment period for tax calculation purposes.
However, if this compensation takes the form of damages set by a court decision, it could benefit from the same exemption as court-ordered dismissal compensation.
IR Mitigation Options (Art. 75 bis)
To prevent the one-time taxation of a significant compensation from pushing the taxpayer into the upper brackets of the scale, the GTC offers two mechanisms:
Option 1: Spreading Over 4 Years
Article 75 bis allows IR to be calculated as if the compensation had been received over 4 years. The tax is then calculated on one-quarter of the taxable portion and multiplied by 4. This mechanism significantly mitigates the progressivity of the scale.
Example: taxable portion of 100,000 MAD → IR calculated on 25,000 MAD (0% bracket) × 4 = 0 MAD in IR, compared to significant IR if the entire amount were taxed at once.
Option 2: Average Rate System
The taxpayer may request the application of the average rate corresponding to their overall income from the previous year to the taxable portion of the compensation. This system is advantageous when the average tax rate from prior years is lower than the marginal rate applicable to the compensation.
Filing Obligations
The employer paying severance compensation must:
- Apply withholding at source on the taxable portion.
- Report the compensation in the annual salary and wages return (form 9421).
- Specify the nature of the departure (dismissal, voluntary departure, resignation) and the exempt amount.
- File the return via the SIMPL platform within the legal deadlines.
The employee may also file an annual return to exercise the spreading or average rate option if the employer was unable to take it into account in the withholding at source.
Frequently Asked Questions (FAQ)
Is dismissal compensation always exempt from IR?
No, the legal compensation (Article 53 of the Labour Code) and damages awarded upon dismissal are exempt up to a global cap of 1,000,000 MAD (Art. 57-7 GTC, 2023 Finance Law). The excess above this cap is subject to the progressive scale.
How does the 4-year spreading work?
The spreading (Art. 75 bis) consists of dividing the taxable portion by 4, calculating IR on this quarter, then multiplying the result by 4. This allows the taxpayer to remain in lower brackets of the scale and significantly reduce the tax. This option must be requested by the taxpayer.
Must a retiree declare their pension?
Since 1 January 2026, pensions paid by the basic schemes (CNSS, CMR, RCAR) and by the CIMR are fully exempt from IR: no IR is due or withheld on these pensions. The allowance of 70% (up to 168,000 MAD) and 40% (above) only remains applicable to pensions outside the scope of this exemption (foreign pensions, private supplementary pensions).
What is the taxation of an early surrender of retirement insurance?
The early surrender of a retirement insurance contract is subject to a final withholding tax of 15% (Art. 73-II-C-5). This levy exempts the taxpayer from any additional filing for this income.
READ ALSO:
- IR-Exempt Allowances in Morocco
- Salary IR in Morocco: 2026 Scale and Calculation
- IR Deductions in Morocco: Complete Guide
- Tax Law Advisory — Upsilon Consulting
This article is written by the team of chartered accountants at Upsilon Consulting, a firm registered with the Order of Chartered Accountants (OEC) of Morocco.
Need guidance on optimizing the taxation of your severance pay? Contact Upsilon Consulting for personalized advice.
