One-fifth rule for income from long-term compensation model

A long-term remuneration model meets the requirements for remuneration for a multi-year activity for which the tax is calculated according to the more favorable one-fifth rule.

Instead of stock option models, long-term compensation models are increasingly being agreed with executives under which additional compensation is paid at the end of a multi-year period based on business performance during that period. Such payments from a long-term compensation model meet the requirements of compensation for several years of service, as confirmed by the Federal Fiscal Court. This means that the wage tax on the additional remuneration is to be calculated according to the more favorable one-fifth rule.

In the case in question, the tax office had initially issued the plaintiff company with a wage tax call notice confirming the application of the one-fifth rule, but then rescinded this notice several years later. The Federal Fiscal Court considered this revocation to be unlawful because the original information was correct, the legal situation had not changed and the tax office had not given any other substantial reasons for revoking the information.