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Tax treatment of company events

Staff and management can get together for the annual company outing, the Christmas party or also an anniversary celebration outside of work in a relaxed and jolly atmosphere. The costs of such company events are, in most cases, not insignificant and therefore repeatedly the focus of tax auditors. Here, disputes can arise in relation to the treatment of the business expenses that have been recognised in terms of income tax, payroll tax and VAT.

Definitions

A company event is one where the group of participants consists mainly of company employees and possibly their accompanying guests (spouses or life partners). By contrast, company events do not include celebrations for individual employees or business dinners. 

The taxation of employee benefits within the scope of company events is regulated in Section 19(1) no. 1a of the German Income Tax Act (Einkommenssteuergesetz, EStG). 

If the costs per employee and per company event do not exceed the amount of € 110 then they would not constitute taxable remuneration. The amount here should be understood to include value added tax. In terms of the number of company events, two events per year would be considered to be reasonable. 

For income tax purposes the €110 rule constitutes a tax-free amount, however, for VAT purposes the amount is classified as a tax exemption threshold. 

Classification for income tax purposes

Allocation of costs

The employer’s costs have to be apportioned among all those participants who were present at the company event. The number of people who were invited is not important. Subsequently, the share of the costs allocated to accompanying guests has to be attributed to the respective employees. No additional tax-free amount of €110 may be recognised for an accompanying guest.

Example: The costs for a company event are €10,000. The participants consist of 75 employees and 25 accompanying guests. In this case, the costs have to be distributed between 100 people so that a benefit-in-kind worth €100 is apportioned to each person. The benefit-in-kind apportioned to an accompanying guest has to be attributed to the respective employees:

  • 50 employees come without an accompanying guest; they have a benefit-in-kind worth €100, which does not exceed the tax-free amount of €110 and is therefore not taxable. 
  • For each of the 25 employees with accompanying guests the benefit-in-kind is worth €200; after deducting the tax-free amount of €110 the taxable benefit-in-kind for each of these employees amounts to €90.

Payroll accounting

Benefits-in-kind generally have to be taxed via the payroll. In practice, employers frequently assume the tax burden so that the employees do not have to bear any financial consequences as a result of participating in a company event. The payroll tax can be levied at a flat rate of 25% (a separate application does not need to be filed with the local tax office). This flat-rate taxation would be permissible even if few employees were affected. In addition to the flatrate payroll tax, the solidarity surcharge at 5.5% and, if applicable, church tax at a flat rate would also be incurred. Due to the flat-rate payroll tax the mandatory social security contributions will not apply.

A recent Federal Fiscal Court (Bundesfinanzhof, BFH) ruling of 27.3.2024 (case reference: VI R 5/22) included a discussion of whether flat-rate taxation may be used if not all employees had been given the option of participating in an event, or whether the total employee benefit should be treated as remuneration that is subject to mandatory tax and social security deductions. The BFH judges were of the opinion that even in such a case flat-rate taxation could take place. The legal definition of a company event merely requires it to be at the company level and to be of a social nature and not that all the company employees have to be invited.

Please note: Non-cash benefits (gifts for employees) would not be a part of remuneration if they were presented during a company party (already according to a Federal Ministry of Finance circular of 14.10.2015). Such benefits are classified as being part of the costs of the company party and, accordingly, have to be offset against the tax-free amount of €110.

Business expense deduction

The costs for the company event as well as the flat-rate payroll tax can be deducted as business expenses even if the tax-free amount has been exceeded. 

VAT treatment

If the per employee amount for the company event exceeds €110 (where applicable, including the share of the costs for each accompanying guest) then none of the input tax for the costs may be deducted. According to the BFH ruling of 10.5.2023 (case reference: V R 16/21), boosting employee motivation and enhancing the workplace atmosphere has to be classified as being for private reasons. However, for an input tax deduction there has to be a direct and immediate link between the input and output transactions. 

Recommendations: Keep a close eye on the option of flat-rate payroll tax, in particular, if there are more than two company events per year. Prior to any event it would make sense to get a detailed calculation of the costs in case they are close to the limit of the tax-free amount per employee. Beyond the tax aspects, the focus should nevertheless be on fostering the atmosphere and togetherness.

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