Legal Updates

Payment to an employee for non-competition upon retirement will almost always be taxes as income and not as capital gains

September 3, 2017

A CEO of a credit cards company retired and was entitled under the employment agreement to a generous sum against an obligation not to work in the field for 6 months. The Tax Authority refused to recognize such payment as capital gains and taxed it as ordinary work income.
The Court held that there is a rebuttable presumption that any payment to an employee by employer is a work income, with the burden to show otherwise is on the employee, which burden is a very heavy one to show that it is indeed payment for the obligation not to compete and not another, such as payment for work or a retirement bonus, just "colored" as such. The contention that payment for a non-competition obligation is a capital gain will be accepted only in rate irregular cases where the employee can show that the meaning of the non-competition obligation is not temporary non-employment but a situation where the employee will not be able to work again at the end of the non-competition period. In this case the non-competition obligation does not limit working in other fields and its period does not "take the employee out of the market" and thus, it is work income and not capital gains