The basic idea behind § 37b of the German Income Tax Act (EStG) is to simplify the tax treatment of non-cash benefits. If the conditions for application are met, the company may pay a flat rate of tax on the benefits. If they are not met, the recipient of the benefit is at risk of taxation. The danger often arises in the case of large and elaborate company events such as a company anniversary. The following section deals with the pitfalls of the flat-rate rule.
1. Generalization according to § 37b EStG
The 2007 Annual Law introduced the provision of Section 37b EStG. According to this provision, taxpayers may levy income tax at a flat tax rate of 30%
- for all benefits granted within a fiscal year and
- business-related benefits,
- which are provided in addition to the service or consideration agreed in any case, as well as
- gifts within the meaning of § 4 (5) sentence 1 no. 1 EStG that do not consist of money.
Flat-rate taxation is excluded if the expenses per fiscal year and recipient (§ 37b (1) sentence 3 no. 1 EStG) or if the expenses for the individual benefit (§ 37b (1) sentence 3 no. 2 EStG) exceed the amount of EUR 10,000.
2. Benefits granted in addition to wages
The original purpose of simplification could not be achieved by the standard in practice, because there was much more dispute about the interpretation of the standard. However, it was agreed that § 37b of the German Income Tax Act (EStG) does not establish a separate type of income, as it is only intended to apply where the granting of benefits is to be recognized by the recipient as business income or wages (German Federal Fiscal Court 12.12.13, VI R 47/12). However, disputes arose regarding the question of whether the benefit was granted „in addition to the service or consideration agreed in any case“ and which amounts (e.g. in the case of expenses for company events) are to be included in the EUR 10,000 limit.
In 2019, the German Federal Fiscal Court (Bundesfinanzhof, BFH) commented on the question under which conditions a certain benefit was granted „in addition to the remuneration owed anyway“ and changed its previous case law on the additionality requirement (BFH 1.8.19, VI R 32/18, VI R 21/17, VI R 40/17). Whereas in the past the BFH had assumed that the application of § 37b EStG was precluded by the additionality requirement in certain circumstances involving salary waivers or salary conversions, it abandoned this view, at least in part. Wages owed in any case are the wages that the employer pays (in any case) without using them for a specific purpose (BFH 1.8.19, VI R 32/18, BStBl II 20, 106).
3. The amended § 8 (4) EStG
If wages are paid for a specific purpose in addition to wages that are owed in any case, only then is there additional wages. Whether the employee is entitled to the additional wages under labor law is irrelevant (BFH 1.8.19, VI R 32/18, BStBl II 20, 106). With regard to the point in time, the point in time of the wage payment is to be taken into account (BFH 1.8.19, VI R 32/18, BStBl II 20, 106). The BFH sees the consequence that the reduction of wages effective under labor law can be compensated by additional benefits tied to use and favorable for tax purposes (1.8.19, VI R 32/18, BStBl II 20, 106).
The tax authorities responded with a non-application decree (BMF 5.2.20, IV C 5 – S 2334/19/10017 :002, BStBl I 20, 222) and implemented the announced adjustment of the law with the introduction of a modified § 8 (4) EStG by the Annual Tax Act 2020 (JStG 2020, 21.12.20):
- § 8 (4) as amended by the JStG 2020.
„For the purposes of this Act, benefits provided by the employer or, at the employer’s instigation, by a third party (benefits in kind or allowances) for employment shall only be provided in addition to the wages owed in any case if:
- the benefit is not offset against the entitlement to wages,
- the entitlement to wages is not reduced in favor of the benefit,
- the benefit for a specific purpose or use is not granted in lieu of a future increase in wages that has already been agreed, and
- if the benefit is discontinued, the salary is not increased.
Under the conditions of sentence 1, a benefit provided in addition to the wages owed anyway is also to be assumed if the employee is entitled to it under the employment contract or on the basis of another legal basis under employment or service law (such as individual contract, works agreement, collective agreement, law).“
The new provision in the Act now ensures uniform use of the term for almost the entire Income Tax Act and clarifies that only „genuine fringe benefits“ provided by the employer are to be tax-privileged. The law does not apply to cases in which the benefits are granted by way of salary conversion or the benefits are.
The aspect of social security for employees also plays an important role, because the basic wage subject to social security contributions has been permanently reduced by such arrangements in favor of additional benefits. There has already been a great deal of criticism of the new regulation in an ongoing legislative process. It was pointed out that the introduction of the standard would lead to unequal treatment of new and old employment contracts (opinion of the Bundesverband mittelständische Wirtschaft e.V.) and to delimitation and dispute issues (opinion of the Bund der Steuerzahler). It is to be expected that there will soon be an opportunity for case law to rule on this newly raised issue.
In the case of larger events, it makes particular sense to contact the relevant tax office in advance in order to clarify the tax consequences in the context of an information call pursuant to § 42e EStG or binding information. If external persons also participate, a refusal to apply § 37b EStG would mean that the benefit would have to be taxed by the recipient of the benefit.
4. Exceeding the 10,000 EUR limit
In the case of events with external accompanying persons, the application of § 37b EStG may also fail if the EUR 10,000 limit is exceeded. Even then, there is a risk of taxation of the benefit by the recipient of the benefit. In order to „save“ the application of § 37b EStG, the question arises as to which expenses are to be included in the assessment basis of § 37b (1) sentence 2 EStG and thus also in the EUR 10,000 limit. The BFH now ruled that the costs for the external framework of the event must also be included. § 37b (1) p. 2 EStG specifies an independent assessment basis, which in some circumstances may lead to a different result than the assessment provision of § 8 (2) EStG.
• Facts of the case (BFH 7.7.20, VI R 4/19)
In 2013, the plaintiff organized a party to which it invited not only employees but also selected employees of affiliated companies and employees of independent retailers. In order to hold the event, the plaintiff incurred expenses for the rental of toilet containers, equipment and decoration, emptying of the toilet tank, hall rental, technical equipment, checkroom containers, travel expenses of event participants, furniture, advertising materials, artists, GEMA, catering, crew catering, hotel room crew and artists. There was no dispute between the parties regarding the fundamental opening of the scope of application of § 37b EStG.
The dispute was whether the tax court was correct in excluding only the expenses for advertising materials from the assessment basis of § 37b EStG or whether the expenses for the external framework of the event should also not be included in the assessment basis of § 37b EStG.
The BFH ruled that the disputed expenses for the external setting of the event were rightly included in the assessment basis of § 37b EStG.
Contrary to the case law on the valuation of a benefit in kind pursuant to § 8 (2) sentence 1 EStG, the costs for the external framework of an event, as well as the costs for renting a concert hall, were also to be included in the valuation of the benefit pursuant to § 37b EStG.
5. Relevance for practice
The decision is one of a large number of decisions on questions of application and interpretation of § 37b EStG. For example, the BFH (13.5.20, VI R 13/18) ruled that the expenses incurred in the engagement of an event agency are to be included in the assessment basis of § 37b EStG. It is rightly argued that the simplification intended with the introduction of § 37b EStG would only be achieved if uniform assessment principles were applied.
The opportunity was missed to align the valuation provisions of § 8 (2) EStG and the assessment basis in § 37b (1) Sentence 2 EStG, in the Annual Act 2020 and to achieve a higher degree of clarity and the intended simplification in this respect as well.