In brief: In Morocco, statutory severance pay is exempt from income tax and CNSS contributions up to MAD 1,000,000. The taxable excess can be spread over four years or taxed at the average rate. Notice pay is fully taxable as salary income.
The taxation of severance pay often causes confusion. The questions many people ask are:
- First, is severance pay subject to Income Tax?
- Second, does it form part of the social security contribution base?
- Finally, how is the tax on severance pay calculated in Morocco?
In our article Severance Pay in Morocco, we covered the methods for calculating severance pay.
In this article, we focus on the tax aspects affecting this compensation in Morocco. We cover the treatment under corporate tax, income tax, CNSS/AMO social contributions, as well as the employer’s reporting obligations.
Read on Mihfada.com: How to calculate severance pay
Taxation of Severance Pay - Corporate Tax
First of all, a company may include severance payments as deductible expenses. The General Tax Code (CGI) provides that any compensation paid by the company in connection with termination of an employment contract constitutes a deductible expense.
See the article on Deductible Expenses for Corporate Tax in Morocco.
The company may deduct severance pay whether it involves:
- First, damages awarded by courts in cases of dismissal
- Second, the severance payment itself,
- Or third, voluntary departure compensation even if it exceeds the statutory amount
It is worth noting that the deductibility applies to the fiscal year during which the severance payment is actually paid or provisioned, in accordance with the matching principle for expenses.
Taxation of Severance Pay: Income Tax
Disciplinary dismissal in Morocco is the termination of an employment contract initiated unilaterally by the employer. The taxation of severance pay under income tax is the most common question, as it directly impacts the net amount received by the employee.
There are three types of compensation to distinguish when an employee is dismissed:
- Severance pay (indemnité de licenciement)
- Damages for unfair dismissal (dommages-intérêts)
- Notice period compensation (indemnité de préavis)
Each of these payments follows a distinct tax regime, which we detail below.
Taxation of Severance Pay: The Exempt Portion
Article 57-7 of the General Tax Code provides for an exemption, within the limits set by current regulations, for:
- Severance pay;
- Voluntary departure compensation;
- and all damages awarded by courts in cases of dismissal.
In practice, the exempt portion corresponds to the statutory severance amount calculated according to the Labour Code scales (Article 53). This scale provides:
- 96 hours of salary per year for the first 5 years of service
- 144 hours of salary per year for the period from 6 to 10 years
- 192 hours of salary per year for the period from 11 to 15 years
- 240 hours of salary per year beyond 15 years
However, in the case of a settlement, severance pay is exempt only within the limits provided by the Labour Code.
The 2023 Finance Law capped the total exempt amount for all such compensation at MAD 1,000,000. This cap applies to the cumulative total of all compensation received upon dismissal (severance pay, damages, etc.). Compensation acquired before 1 January 2023 remains subject to the previous provisions, regardless of the actual payment date.
Taxation of Severance Pay: The Taxable Portion
When the severance amount exceeds the statutory amount (or the MAD 1,000,000 cap), the excess is subject to income tax. The employee then has two options for calculating the tax on the taxable portion:
Option 1: The spreading system (étalement). The taxable amount is notionally spread over four years (or over the actual period of service if less than four years). Income tax is calculated each year on one quarter of the taxable amount, which helps mitigate the progressive tax rate impact.
Option 2: The average rate method (taux moyen). The employee may opt for the application of the average rate corresponding to the taxable income of the last year of employment. This average rate is calculated by dividing the tax owed on total income for the last year by the taxable income of that same year. This rate is then applied to the taxable portion of the severance pay.
The employee chooses whichever option is more advantageous. In practice, the spreading system is often more favourable for employees with higher incomes.
Taxation of Damages for Unfair Dismissal
Damages awarded by courts in cases of unfair dismissal are exempt from income tax. Under Article 41 of the Labour Code, the amount of damages equals 1.5 months of salary per year of service, capped at 36 months of salary.
The law also exempts compensation obtained by the employee through the settlement process, within the limits of the statutory amount.
However, the overall cap of MAD 1,000,000 introduced by the 2023 Finance Law applies to the cumulative total of all compensation, including damages. Beyond this cap, the excess portion is subject to income tax.
Taxation of Notice Period Compensation
Unlike severance pay, notice period compensation is fully subject to income tax. It is considered a salary supplement and therefore follows the standard tax treatment for employment income.
Notice period compensation is calculated based on the salary and benefits the employee would have received had they continued working during the notice period. It is subject to the progressive income tax scale, CNSS contributions, and AMO.
CNSS and AMO Treatment of Severance Pay
Statutory severance pay is exempt from social security contributions (CNSS) and mandatory health insurance (AMO). Only the portion that exceeds the statutory amount is subject to social contributions.
In contrast, notice period compensation, being treated as salary, is subject to CNSS and AMO contributions under normal conditions. The applicable rates are those in force at the time of payment.
Damages for unfair dismissal are also exempt from CNSS and AMO contributions, as they do not constitute remuneration but rather compensation for harm suffered.
Loss of Employment Benefit (IPE) Paid by the CNSS
The CNSS pays a loss of employment benefit (indemnité pour perte d’emploi, or IPE) to employees who involuntarily lose their jobs. The benefit is capped at the minimum wage (SMIG). This benefit is separate from the severance pay provided by the employer.
The conditions for eligibility are as follows:
- Having accumulated at least 780 days of CNSS declarations during the 36 months preceding the loss of employment
- Being registered with ANAPEC within 60 days of losing the job
- Not having reached the legal retirement age
The IPE amount equals 70% of the average monthly salary over the last 36 months, capped at the minimum wage (SMIG). The IPE is paid for a maximum of 6 months. This benefit is exempt from income tax.
Practical Calculation Example
Let us consider an employee with 12 years of service and a gross monthly salary of MAD 20,000.
Calculation of statutory severance pay:
- First 5 years: 96h x 5 x (20,000 / 191.36h) = MAD 50,134
- From 6 to 10 years: 144h x 5 x (20,000 / 191.36h) = MAD 75,201
- From 11 to 12 years: 192h x 2 x (20,000 / 191.36h) = MAD 40,134
- Total statutory severance: MAD 165,469 (exempt from income tax)
If the employer pays a total severance of MAD 250,000, the taxable portion is 250,000 - 165,469 = MAD 84,531. The employee can opt for the spreading system or the average rate method to calculate income tax on this fraction.
Employer’s Reporting Obligations
The employer has several obligations when paying severance compensation:
- Tax authority declaration: The employer must report all compensation paid to the dismissed employee in the annual salary declaration (form 9421). The exempt portion and the taxable portion must be clearly distinguished.
- Withholding at source: The employer is required to withhold income tax at source on the taxable portion of the severance pay. Failure to withhold exposes the employer to penalties and surcharges.
- CNSS declaration: Notice period compensation must be declared to the CNSS. Statutory severance pay does not need to be included in the contribution base.
- Document delivery: The employer must provide the employee with a work certificate, a final settlement statement, and a salary attestation for the CNSS.
Non-compliance with these obligations may result in tax reassessments and financial penalties.
Frequently Asked Questions
Is severance pay subject to income tax in Morocco?
The statutory portion of severance pay, calculated according to the Labour Code scales, is exempt from income tax. However, the 2023 Finance Law capped the total exempt amount at MAD 1,000,000 for all dismissal-related compensation combined. Any amount exceeding either the statutory calculation or this cap is subject to income tax.
How is the taxable portion of severance pay calculated?
When severance pay exceeds the exempt amount, the employee can choose between two methods to calculate income tax on the excess. The spreading system divides the taxable amount over four years to reduce the progressive tax rate impact. Alternatively, the average rate method applies the average tax rate from the employee’s last year of employment to the taxable portion.
Is notice period compensation taxed differently from severance pay?
Yes, notice period compensation is fully subject to income tax, unlike severance pay which benefits from a partial exemption. Notice period compensation is treated as a salary supplement and follows the standard tax treatment for employment income. It is also subject to CNSS and AMO social security contributions under normal conditions.
This guide was prepared by Upsilon Consulting, a chartered accounting firm in Casablanca with over 20 years of expertise in Moroccan tax law and payroll compliance.
Are damages for unfair dismissal subject to income tax?
Damages awarded by courts in cases of unfair dismissal are exempt from income tax, as well as from CNSS and AMO contributions since they compensate for harm rather than constituting remuneration. However, the overall cap of MAD 1,000,000 introduced by the 2023 Finance Law applies to the cumulative total of all dismissal-related compensation, including damages.
