Conditions for tax-free fringe benefits

The German Federal Ministry of Finance has issued a statement on the requirements for the tax-free granting of fringe benefits and the permissibility of salary conversions.

In most cases, tax exemptions for benefits paid by the employer to its employees are linked in the Income Tax Act to the fact that they are granted "in addition to the salary owed in any case". This restriction is intended to explicitly exclude benefits based on a salary waiver or salary conversion from the tax benefit so that the tax exemption is not primarily exploited for tax structuring purposes.

According to the previous case law of the Federal Fiscal Court, employer benefits are only granted in addition to the salary owed anyway if they are voluntary, i.e. if they are benefits that the employer does not owe under labor law. However, the Federal Fiscal Court changed this interpretation in several rulings last year and is now of the opinion that the tax benefits may also be eligible - depending on the structure of the employment contract - in the event of a salary waiver or salary conversion.

According to the rulings of the German Federal Fiscal Court, the only prerequisite for such cases is that the regular salary is effectively reduced under labor law in favor of benefits from the employer that are earmarked for a specific purpose or use (change of salary form). Otherwise, there is still an imputation or offsetting that is detrimental to the tax benefit. Collectively agreed wages cannot therefore be reduced in favor of certain other tax-privileged benefits or converted in favor of these, as the entitlement to the collectively agreed wages would revive once the tax-privileged benefits ceased to exist.

In practice, however, the new ruling of the Federal Fiscal Court changes little, as the Federal Ministry of Finance has now responded to the change in case law with a non-application decree. In this, the Ministry also announces a change in the law with which the conditions that the tax authorities are now specifying for the additionality requirement are to be anchored in the law.

According to this non-application decree, benefits provided by the employer (benefits in kind or allowances) to its employees are only provided "in addition to the wages owed anyway" if the following four conditions are met:

1. The benefit is not credited against the entitlement to wages.

2. The entitlement to wages is not reduced in favor of performance.

3. The appropriation or earmarked benefit is not granted in lieu of a future increase in wages that has already been agreed upon.

4. If the benefit is discontinued, wages are not increased.

These requirements apply regardless of whether the wages are subject to collective bargaining agreements. Thus, only genuine fringe benefits provided by the employer continue to be tax-privileged under all wage and income tax law. According to the Ministry's letter, the guidelines are to be applied in all open cases.