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Payments in kind: vouchers, prepaid and cash cards etc. proposed subject to payroll tax and social security contributions for employees?

On 8 May 2019, the German Federal Ministry of Finance (BMF) published a draft law that contains further tax incentives for electro mobility as well as amendments to other tax regulations. The draft law was sent to selected associations such as the Prepaid Verband Deutschland e.V. It contains a new definition to differentiate between income subject to payroll tax and social security contributions and payments in kind which are exempt from payroll tax and social security contributions up to 44 euros per month.

Payments in kind: distinction between income paid in cash and payments in kind until now

Income paid in cash by an employer to its employees is subject to payroll tax and social security contributions. Payments in kind are exempt from payroll tax and social security contributions only up to a limit of 44 euros per month for an employee. Payments in kind are generally considered the provision of benefits in the form of goods and services to an employee. It should be noted that the 44-euro exemption limit does not apply to certain payments in kind. If the employee receives goods or services that are manufactured, distributed or provided by the employer itself, the so-called discount allowance of currently 1,080 euros per year applies. Likewise, the 44-euro exemption limit does not apply to goods for which an official payment in kind value has been determined, such as e.g. for food and accommodation.

According to previous case law of the German Federal Fiscal Court (e.g. from 11/11/2010 – VI R 27/09, BStBl. II 2011, 386), a payment in kind exists if an employer attaches the condition to its payment to an employee that the amount of money received can only be used in a specified way and that the employee has no claim to the money itself being paid out to him or her. If, for example, an employee has received a petrol voucher for 30 euros and the employee cannot have this amount paid out by the employer, this constitutes a payment in kind which is exempt from income tax and social security contributions.

Payments in kind: proposed amendments

According to the proposed amendments, the following benefits provided by employers should also be classed as monetary income rather than payments in kind (Section 8 para. 1 sentence 2 EStG-E): cash benefits provided for a specific purpose, subsequent cost reimbursements, money equivalent  and other benefits for a monetary amount as well as contributions or benefits that serve to insure an employee or their next of kin against illness, accident, invalidity, old age, death or other risks with a third party provider but with the employee receiving a direct legal claim. According to the proposed amendments, the aforementioned list of monetary income does not apply to vouchers entitling the holder to purchase goods or services from the issuer of the voucher (Section 8 para. 1 sentence 3 EStG-E).

The explosive nature of the planned amendments for employees, the voucher and prepaid industry as well as on trade

The proposed amendments would have considerable consequences for employees, the voucher, e-money and prepaid industry as well as for trade. First, it should be noted that if the amendments are implemented, this would extend the definition of monetary income, in particular by adding “money equivalents”. This term is not defined in the German tax laws. According to general understanding, money surrogates in payment transactions are all means of payment that are not classed as legal means of payment (German “Geldersatzmittel” –> https://de.wikipedia.org/wiki/Geldersatzmittel). It can therefore be assumed that any vouchers, prepaid products as well as corporate credit cards that are handed over to the employee for private use will have to be qualified as income which is subject to payroll tax and social security contributions if the proposed amendments are implemented.

To the extent employers will in future refrain from giving out prepaid products within the 44-euro exemption limit, as these are subject to payroll tax and social security contributions, the proposed amendment of the law will lead to a considerable net loss of income for employees.

Proposed exception: two-party vouchers continue to be a payment in kind

On the whole, the proposed exemption of vouchers for goods or services should be welcomed. However, it should be noted that the planned exemption only applies to vouchers that entitle the holder to purchase goods and services “from the issuer of the voucher”. This addition suggests that only vouchers in a two-party relationship will continue to be considered payments in kind and therefore fall under the 44-euro exemption limit.

However, trading companies are often set up in a decentralised legal structure, e.g. as a franchise or a group of companies. If, for example, a holding company issues vouchers that can be redeemed at other companies within its group, such vouchers are, strictly speaking, not covered by the exemption under the proposed amendments, since the issuer is a different entity from the entity where the voucher can be redeemed. In this respect, the proposed amendments place a considerable restriction on the distribution possibilities of trading companies.

 

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