20. April 2020

Just before Easter the Federal Ministry of Finance approved tax-free special payments for employees. Employers can now reward their employees in the coronavirus crisis with supplementary tax-free payments of up to EUR 1,500 , either as cash benefits or benefits in kind.

Companies in system-relevant sectors have indicated that they intend to pay unscheduled special bonuses to employees as a reward and as appreciation for their outstanding dedication in the current crisis-stricken economic framework.

The government supports their initiatives. On 3 April Federal Minister of Finance Olaf Scholz confirmed tax relief measures in a press release that was intended to send out a political signal. People who have continued to work throughout the crisis need more than ‘a few friendly words over the counter’ or ‘applause for medical personnel’. They deserve financial benefits in the form of special tax and social security contribution-exempt payments from their employer.

I. Decree on tax exemption

In an e-mail decree dated 9 April the Ministry of Finance announced certain measures to make financial support payments more attractive from a tax perspective. The legal basis is § 3, No. 11 of the German Income Tax Act (Einkommensteuergesetz, EStG). The underlying norm permits aid and support in the form of tax relief if justifiable grounds exist (cf. R 3.11, Par. 2, Line 2 LStR (German wage tax regulations)). The Ministry of Finance considers ‘the impact of the coronavirus crisis on the entire society’ to constitute justifiable grounds.

The tax relief applies as follows:

• The employer grants cash bonuses or benefits in kind up to a maximum of EUR 1,500;
• in the period 1 March 2020 to 31 December 2020;
• and in addition to the employees’ regular wages or salaries .

The other requirements of § 3, No. 11 EStG, which are derived from the wage tax guidelines (R 3.11 Par. 2, Nos. 1-3 LStR), do not have to be met. It is only necessary to post the tax-exempt amounts to the payroll account. Other tax exemptions are not affected and can still be claimed in addition to the tax-free special coronavirus payment.

Special coronavirus payments are also not subject to the progression rule in the same way that short-time allowances or unemployment benefits are. As a result, they do not increase the employee’s tax rate, which would result in an additional hidden tax burden.

In the press release Minister of Finance Olaf Scholz also announced that the special payments would be exempt from social security contributions .

II. Special payments for employees receiving short-time allowance

It defies logic for companies to introduce short-time working in conjunction with a staff bonus. However, companies that are planning to make a special payment to employees during a short-time working phase should consider the consequences on short-time allowance eligibility. No public announcement has been made as yet on the impact of special coronavirus payments on short-time allowance.

However, according to precedent the special coronavirus payment is likely to be classified as non-recurring remuneration as defined in § 106, Par. 1 Clause 4 of the German Social Code, Book III (SGB III) and will therefore have no negative impact on the amount of short-time allowance and not be classified under SGB III as a contributory benefit or a taxable salary or wage payment.

Caution should nevertheless be exercised if the special payment is made in addition to short-time allowance. It is necessary to ensure that the total amount does not exceed the employee’s regular wage or salary. Some people are of the opinion that, in this case, there would be no loss wage for the employee and grounds would exist to withhold the short-time allowance. The consequence would be that the well-meant special payment would result in the unintentional loss of the short-time allowance. Employers can avoid this problem by waiting until the short-time working phase is over before making the special payment (although it must be made before the end-of-year cut-off date).

III. No tax exemption on short-time allowance top ups

Finally, we have to consider the fact that the tax exemption explicitly does not apply to employer-side short-time allowance contributions. It also does not cover the employer’s contributions in lieu of short-time allowance as a result of the assessment ceiling being exceeded. The special payment is therefore not a back door instrument for tax-free short-time allowance top ups.

IV. Conclusion

The tax and social security contribution-exempt special payment is a welcome initiative that enables employers to reward their employees for outstanding dedication during the crisis. Nevertheless, they should carefully consider whether to make a special payment to employees in short-time working phases.

Your contact persons:
Tobias Neufeld, LL.M., Partner
M +49 172 6865 911
E tobias.neufeld@localhost