Leading ruling of the Federal Supreme Court on the taxation of compensation for termination without notice dated January 19, 2026 (9C_96/2024)

In a decision dated January 19, 2026 (9C_96/2024), which is scheduled for publication, the Federal Supreme Court ruled for the first time on the taxation of compensation for unlawful termination without notice. Back in 2022, the Federal Supreme Court classified compensation for wrongful termination as tax-exempt satisfaction (BGE 148 II 551).

The issue in dispute in the present case was whether compensation for unlawful termination without notice can also be classified as satisfaction and is therefore tax-exempt (see art. 24 lit. g DTFA and art. 7 para. 4 lit. i DTHA) or whether it is (partially) subject to income tax (see art. 16 para. 1 and art. 17 para. 1 DFTA as well as art. 7 para. 1 DTHA).

In the present case, the compensation is attributable to the objectively justified but belated termination without notice of the appellant from a management position at a federal office and was based on the Federal Personnel Act (see Art. 34b para. 1 lit. a FPA). After the Tax Administration of the Canton of Bern, the Tax Appeals Commission, and the Administrative Court classified the compensation of around CHF 133,000 as taxable income, the appellant appealed to the Federal Supreme Court.

In connection with the wrongful termination, the Federal Supreme Court stated in the decision cited above that compensation under art. 336a of the Swiss Code of Obligations (CO) serves both to compensate for immaterial injustice and to sanction misconduct. Since the first element predominates in compensation for wrongful termination and a division is practically impossible, the Federal Supreme Court ruled that it should be classified as tax-free satisfaction entirely.

In the present case, both the Tax Administration and the lower courts took the view that the compensation must be classified on the basis of the actual circumstances and that the (minor) violation of personal rights played a subordinate role due to the objective admissibility of the termination without notice.

The Federal Supreme Court initially rejects the possibility of dividing the compensation into compensation by way of satisfaction and punishment. If a significant violation of personal rights has occurred, the punitive purpose cannot override the satisfactory nature, which is why the entire compensation is tax-free. The same applies to art. 34b para. 2 FPA, although this privileges the employee in comparison to art. 337c para. 3 CO in that the compensation can amount to at least six months’ salary and a maximum of one year’s salary (instead of a maximum of six months’ salary) – in return for greater flexibility in the termination of employment relationships and the waiver of continued employment in the event of unlawful termination within the framework of the revision of the FPA. The Federal Supreme Court thus confirms that the case law developed for compensation in the event of wrongful termination also applies to compensation in the event of termination without notice.

The follow-up question was whether there are reasons why compensation for unlawful termination without notice should not be classified as satisfaction. The Federal Supreme Court concluded that if the satisfactory nature does not predominate, the entire compensation is subject to income tax. In contrast to art. 336a CO, the predominance of the satisfactory nature of the compensation for unlawful termination without notice cannot be taken for granted. If it is awarded solely on the basis of a forfeiture of the right of termination due to the passage of time, the violation of personal rights is not so serious that the compensation could be considered of satisfactory nature.

The Federal Supreme Court therefore upheld the view of the Tax Administration and the lower courts that the compensation awarded to the appellant was not tax-exempt and was therefore taxable as income, and dismissed the appeal.

In practice, this means that in future, when awarding compensation for unlawful termination without notice, the reasons that led to this compensation must be carefully considered. If the termination without notice is unlawful solely on the basis of formal errors (e.g., late notification), the compensation does not qualify as satisfaction and is therefore not tax-exempt.