Distinction between cash benefit and benefit in kind

Since 2020, new requirements have applied to the distinction between cash benefits and benefits in kind, about which the Federal Ministry of Finance has now answered many questions, particularly about vouchers.

There are certain tax exemption regulations for non-cash benefits and options for lump-sum taxation, which is why many employers often use non-cash benefits and bonus programs to motivate employees or optimize net wages. In particular, the monthly exemption limit for non-cash benefits of 44 euros (50 euros from January 1, 2022) is readily exploited. However, the popularity of such benefits combined with taxpayer-friendly rulings by the German Federal Fiscal Court has prompted the tax authorities to tighten the statutory regulation from 2020.

With the amendment to the law, earmarked cash benefits and subsequent reimbursements of expenses to the employee in particular, but also in certain cases vouchers and cash cards, were classified as cash benefits that do not fall under the tax concession regulations. Earmarked vouchers including digital vouchers, voucher codes and voucher apps as well as corresponding cash cards including prepaid cards, on the other hand, continue to be considered non-cash benefits. The prerequisite is that the vouchers or cash cards exclusively entitle the holder to purchase goods or services from the employer or a third party and also meet certain criteria from the Payment Services Supervision Act.

While the new regulation is relatively clear for direct payments, whether in advance with earmarking or retrospectively as reimbursement of costs, it has caused more confusion than clarity in the case of vouchers and credit cards, because the demarcation between beneficiary and non-beneficiary benefits has long been unclear. However, the Federal Ministry of Finance finally recognized the problem this year and issued a comprehensive administrative instruction on the demarcation between cash benefits and benefits in kind.

This administrative instruction applies retroactively from the effective date of the new regulation, i.e. from January 1, 2020. At the same time, however, it also contains a non-objection provision according to which vouchers and cash cards that entitle the holder exclusively to purchase goods and services but do not meet the requirements of the Payment Services Supervision Act will continue to be recognized as non-cash remuneration until December 31, 2021. This is intended to give providers of corresponding offers sufficient time to adapt to the new requirements.

Initially, the German Pension Insurance Association did not want to support retroactive application of the non-objection rule, which would have meant that it would have largely come to nothing because different treatment under tax and social security law would have made everything even more complicated. In the meantime, however, the leading organizations of the social insurance institutions have agreed to support the non-objection regulation and to follow the transitional regulation of the tax authorities in terms of contribution law until December 31, 2021.

At the same time, however, the social insurance institutions clarify that employers who have treated vouchers and cash cards as subject to tax and social security contributions in accordance with the new legal regulation from 2020 cannot expect a contribution refund or set-off against current contribution claims. Only if the employer can still leave these receipts free of wage tax retroactively for the respective accounting period with reference to the tax law non-objection rule that only became known later, will it also not be objected to under contribution law if, together with this wage tax law correction, a set-off of the contributions against current contribution claims is made. As a rule, this should therefore only affect the accounting periods from January 2021.

Despite the non-objection rule, however, the problem of differentiation remains in the case of vouchers and credit cards from 2022. The Federal Ministry of Finance therefore explains in some detail which vouchers and cash or credit cards are permanently recognized as non-cash benefits and which are to be assessed as cash benefits from 2022. Both cases can be divided into four categories. The following benefits are permanently regarded as non-cash benefits:

• Redemption at the exhibitor: Vouchers or cash cards with or without an amount that can be redeemed exclusively with the issuer of the voucher for goods or services from its own product range. This includes, for example, reloadable retail gift cards (including shop-in-shop solutions and loyalty cards from department stores, shopping centers and outlet villages) or fuel vouchers and cards from an individual service station operator or a specific service station chain for the purchase of goods or services at the service station. Cards of an online retailer that only entitle the holder to purchase goods or services from its own product range (sale and dispatch by the online retailer) are also covered by this category, as long as they are not also redeemable for products from third-party suppliers (e.g. Marketplace). The location of the issuer as well as its product range are not limited to the domestic market for this category.

• Limited points of acceptance: Vouchers or cash cards with or without an amount that can be redeemed exclusively for goods or services at a limited group of points of acceptance in Germany. In particular, municipal or regional shopping and service associations ("city cards" and city vouchers) are considered to be a limited group of points of acceptance. For reasons of simplification, the tax office also considers this requirement to be met in the case of cards issued by a specific chain of stores for goods or services from the individual stores in Germany or from the Internet store of this chain of stores. It does not matter whether these are the employer's own stores, cooperative stores or franchisees. A voucher issued by the employer itself (e.g. fuel voucher) is also eligible if the points of acceptance settle directly with the employer on the basis of contractual agreements.

• Limited assortment: Vouchers or cash cards with or without an amount for goods or services exclusively from a very limited range of goods or services. The number of points of acceptance and the domestic purchase are then irrelevant. This includes vouchers and credit cards whose redemption is only possible at merchants and service providers that exclusively offer goods or services from a specific area (e.g. bookstore, gym, passenger transport, streaming services) and vouchers that are limited to a specific category at providers with a broader range of products, e.g. fuel cards that can only be redeemed at any gas station for fuel and car accessories, but not for other goods sold there (food, magazines).

• Purpose Cards: Vouchers or cash cards with or without an amount that only entitle the holder to purchase goods or services exclusively for specific social or tax purposes in Germany on the basis of acceptance agreements between the issuer/issuer and points of acceptance (e.g. meal tickets, meal vouchers or treatment cards). The number of points of acceptance is irrelevant. The card is not a special-purpose card if its scope of use is no longer sufficiently defined. A favored purpose in this sense is therefore not, in particular, the use of the non-monetary remuneration exemption limit or other tax concession or lump sum regulations.

In contrast to the categories listed above, the following four categories of vouchers or credit cards do not meet the requirements of the Payment Services Supervision Act and are thus considered cash benefits in any case as of 2022:

• Money surrogates: These are, in particular, cash cards or prepaid credit cards with nationwide acceptance without restrictions on the range of products that can be purchased with them and that can be used in non-cash payment transactions. The mere fact that the applicability of such cards is limited to Germany is not sufficient for the assumption of a non-cash benefit.

• Payment function: Vouchers or cash cards that do not exclusively entitle the holder to purchase goods or services from the employer or a third party, but also have a cash payment function (the payment of residual credit up to one euro is harmless), have their own IBAN or can be used for transfers, the purchase of foreign currency or otherwise as a payment instrument.

  

• Marketplaces: Vouchers or cards of an online merchant that entitle the holder not only to purchase goods or services from its own product range (sale and shipment by the online merchant), but are also redeemable for products from third-party suppliers (e.g. Marketplace).

• Wide acceptance: Vouchers and cash cards that can be redeemed at a variety of acceptance points (online and local) without being limited to a specific product range will also be cash wages in the future.

In addition to compliance with the requirements of the Payment Services Supervision Act, the Federal Ministry of Finance also addresses other aspects that must be observed in the case of non-cash benefits in the form of vouchers or credit cards. These rules apply without time restriction, i.e. also for past periods.

• Additionality: From 2020, the prerequisite for the application of the non-monetary remuneration exemption limit of 44 euros (50 euros from January 1, 2022) to vouchers and cash cards is that they are granted in addition to the salary that is owed anyway. The tax benefit is thus excluded in particular in the context of salary waivers or conversions.

• Rating: For the tax valuation of non-cash benefits, a deduction of 4 % on the final price is provided to cover lump-sum customary discounts. However, this deduction of 4 % is not to be made if the voucher is issued for a maximum amount denominated in euros.

• Inflow date: The time at which a benefit in kind accrues, and thus the period in which it is to be recognized for tax purposes, depends in the case of vouchers and cash cards on whether they are to be redeemed with the employer itself or with a third party. If the voucher is redeemed with a third party, the benefit in kind is recognized at the time the voucher is issued to the employer. In the case of cash cards, the inflow occurs at the earliest at the time the credit is loaded, because the employee only receives a legal claim against the third party at this time. If, on the other hand, the voucher or cash card is to be redeemed with the employer, the non-cash benefit only accrues at the time of redemption.

• System Cost: The fees borne by the employer for the provision and loading of vouchers and cash cards are not an additional non-cash benefit, but a necessary concomitant of the employer's operational objectives and therefore not remuneration of the employee. However, the Ministry has only explicitly regulated this for vouchers and cards that are issued within the scope of the non-monetary remuneration exemption limit. Since the Federal Fiscal Court ruled only last year that all of the employer's expenses must be included in the assessment basis for the lump-sum taxation of non-cash remuneration, it is advisable to obtain a call from the tax office if vouchers are to be issued as non-cash remuneration subject to lump-sum taxation and such charges amount to a significant sum.

• Safety: The Treasury requires that the functional limitation of vouchers and cash cards be ensured in an appropriate manner through technical precautions and in the contractual agreements to be used.

Even though the majority of the administrative instruction deals with issues related to vouchers and cash cards, the Ministry also addresses other forms of employee benefits. Especially in the case of payments to employees or in their predominant interest, in most cases there is a cash benefit.

• Health & Long-Term Care Insurance: The granting of health, daily sickness allowance or long-term care insurance cover is a benefit in kind if the insurance is taken out and contributions paid by the employer. If, on the other hand, a payment is made by the employer to the employee, this is also a cash benefit if the employer's payment is linked to the condition that the employee concludes an insurance contract with a company designated by the employer.

• Accident insurance: The granting of accident insurance coverage is also a benefit in kind, insofar as the employee can assert the insurance claim directly against the insurance company when taking out voluntary accident insurance through the employer. However, in the case of contributions to accident insurance that can be paid in a lump sum, the exemption limit for remuneration in kind does not apply.

• Meals: Provided that the other wage tax regulations on meals are fulfilled, the granting of meal vouchers (meal vouchers, restaurant vouchers) or workday allowances for meals (digital meal vouchers) is a benefit in kind.

• Reimbursement of expenses: A payment to the employee in lieu of the goods or services owed (earmarked cash payment or subsequent reimbursement of expenses) is not remuneration in kind. The situation is different for amounts received by the employee from the employer to spend on the employer's behalf (pass-through money) or reimbursed by the employee for expenses incurred on behalf of the employer (reimbursement of expenses). These are, of course, tax-free. However, if the employee has his or her own interest in the goods or services received, there is no tax-free reimbursement of expenses. The tax office assumes that the employee has his or her own interest if the goods or services are intended for the employee's private use.