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Tax-exempt benefits provided in addition to remuneration

The Federal Fiscal Court (Bundesfinanzhof, BFH) only recently abandoned its view on the possibility of paying flat-rate payroll tax for benefits provided in addition to remuneration and contradicted the practice of the fiscal authority. In a letter of implementation, the Federal Ministry of Finance (Bundes­ministerium der Finanzen, BMF) has now modified the case law of the court and established its own guidelines.

New supreme court case law – The specific use and/or purpose is relevant

In its rulings from 1.8.2019 (case references: VI R 32/18, VI R 21/17, VI R 40/17), the BFH assumed that benefits were provided “in addition to remuneration due in any case” if the benefits had a specific use and/or purpose. This interpretation of the law had opened up new possibilities for the structuring of employment contracts. It was possible to convert taxable gross salary into remuneration that was not subject to payroll tax.

The view of the fiscal authority

In order to ensure continuity in the application of the law, in its letter of implementation, from 5.2.2020, the BMF defined the following conditions for providing tax-exempt benefits.

  • The benefit will not count towards the entitlement to remuneration.
  • The entitlement to remuneration will not be reduced in favour of the benefit.
  • The benefit for a specific use and/or purpose will not be provided instead of a future increase in the remuneration that has already been agreed.
  • If the benefit is eliminated then the remuneration will not be increased.

The above-mentioned conditions will apply irrespective of whether or not the remuneration is subject to collective agreements. Accordingly, only genuine additional benefits from the employer will be tax-privileged.

Recommendation: The legislative change in Section 8 to the German Income Tax Act has already been included in the draft of the German Act on the Introduction of a Basic Pension. As a result, the hurdles for models of gross-to-net remuneration optimisation will be raised once again. With a view to the legislative changes that have been announced you should therefore review new arrangements and closely monitor further developments.

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