Finally: vouchers and prepaid cards are still considered payments in kind pursuant to the German Payment Services Supervision Act (ZAG)

Gutscheine | Geldkarten | ZAG | Sachbezug | vouchers | prepaid cards | payments in kind | PayTechLaw

Amendments applicable to vouchers and prepaid cards

Last year, I reported on the conditions under which vouchers & co. are still considered payments in kind within the 44-euros per month limit according to the proposed amendments. Interested parties can find articles on the subject of payments in kind and an update on payments in kind on PayTechLaw.

In the end, things turned out differently than the previously proposed amendments had suggested. According to the new Section 8 para. 1 sentence 2 EStG (German Income Tax Act), which came into force on 01/01/2020, vouchers and prepaid cards are no longer considered payments in kind. However, there is an exception (Section 8 para. 1 sentence 3 EStG). According to this, vouchers and prepaid cards continue to be considered payments in kind,

if they

„..ausschließlich zum Bezug von Waren oder Dienstleistungen berechtigen und die Kriterien des § 2 Absatz 1 Nummer 10 des Zahlungsdiensteaufsichtsgesetzes erfüllen.“ („..exclusively entitle the holder to purchase goods or services and fulfil the criteria of Section 2 para. 1 No. 10 of the Payment Services Supervision Act.“)

Payment Services Supervision Act (ZAG)?

The first thing jumping out at the reader is a provision and act that is usually not known to people applying tax law, namely Section 2 para.1 No. 10 of the German Payment Services Supervision Act (ZAG). The ZAG contains supervisory rules regarding payment services (e.g. money remittance business, payment initiation and account information services) as well as e-money business, the provision of which requires certain authorizations and is subject to the German Financial Supervisory Authority.

Section 2 para. 1 No. 10 ZAG contains different so-called block exemptions, meaning that if the conditions are met, the service under consideration does not constitute e-money or a payment service regulated by the ZAG. Pursuant to Section 2 para. 1 No. 10 ZAG services neither constitute payment services nor e-money if they are based on payment instruments that:

a) may be used for the purchase of goods or services at the premises of the issuer or within a limited network of service providers under a commercial arrangement with a professional issuer;

b) may be used to acquire a very limited range of goods or services, or

c) are limited to domestic use and are made available at the request of a company or public institution for certain social or fiscal purposes in accordance with public law provisions for the acquisition of the goods or services specified therein from providers who have entered into a commercial agreement with the issuer;

Generally speaking, it is quite a sensitive topic if a tax law provision contains a reference to another law, since this means that the responsible tax authorities and fiscal courts are required to apply a law for which normally other courts are responsible. There is no court jurisdiction for the provisions of Section 2 para. 1 No. 10 ZAG.

The German Federal Financial Supervisory Authority (BaFin) is the responsible authority for the application of the ZAG. BaFin has also published a Guidance Note on the ZAG. Although BaFin operates under the umbrella of the German Federal Ministry of Finance, which is also responsible for tax law, it remains to be seen to what extent the tax authorities will adopt the statements published by BaFin.

In short: without knowing the ZAG, it is not possible to answer the question of whether or not a voucher or prepaid card is still considered a payment in kind.

Outstanding issues

The wording of the new regulation leaves significant room for interpretation. This results in a number of open questions, some of which are listed below as examples.

Is a voucher still a payment in kind if it is used to acquire rights, for example, rather than goods and services? In my view, such a narrow interpretation of the wording would not be appropriate in light of the desired distinction between cash payments and payments in kind, since, for example, an acquired right of use is obviously not a cash payment.

What happens if the voucher can only be redeemed with the issuer of the voucher (two-party voucher)? If all the conditions of Section 2 para. 1 No. 10 ZAG had to be fulfilled, only vouchers in a three-party relationship would be payments in kind, since Section 2 para. 1 No. 10 ZAG requires a three-party system. This interpretation, however, would stand incomplete contrast to the development of the law as well as the official justification for the law (cf. BT- publication 19/14909, p. 44).

The fact that it has not yet been finally resolved how Section 2 para. 1 No. 10 letters a) to c) ZAG are to be interpreted under supervisory law, makes the application of this provision even harder. There is a Guidance Note available from the BaFin. However, this does not (and cannot) clarify all the issues that arise for the industry. Furthermore, it remains to be seen whether and to what extent the tax authorities agrees with the view of the BaFin.

Waiting for the German Federal Ministry of Finance (BMF)

In view of the outstanding issues listed in the previous section, the way in which the tax authorities interprets these outstanding issues is vitally important for the companies issuing and distributing such products. Similarly, employers (and employees) do not want to have to pay income tax unexpectedly after a payroll tax audit and, if need be, enter into lengthy appeal and fiscal court proceedings.

It is reported that the BMF is in the process of drafting and publishing a decree on the re-regulation of the payment-in-kind regime for vouchers and prepaid cards. So far, the relevant associations have not received any draft of the BMF letter. In view of the measures taken by the Federal Government to deal with the Corona crisis, the drafting and publication of the BMF letter is likely to take some more time.

What can employers do?

  1. Request for income tax information

Employers can request the disclosure of information on income tax at the income tax authority responsible for them (Section 42e EStG). In such requests, employers can inquire whether the respective voucher or prepaid card is a payment in kind under the new regulation. If the tax authority has information that a BMF letter on the new regulation is planned, it is to be expected that the tax authority would first wait for the publication of the BMF letter. In contrast to a binding request for information (Section 89 para. 2 German Tax Code (AO)) this request for information on income tax is free of charge.

  1. Retrospective denial of classifications as payments in kind?

a. On the basis of the new regulation

The new regulation is only applicable to payments in kind and salaries which accrue to the employee after 31 December 2019 (Section 52 para. 1 sentence 2 EStG), i.e. vouchers transferred to employees in January 2020. Vouchers which were considered to be payments in kind before 1 January 2020 thus retain their classification as payments in kind.

b. On the basis of the German Federal Fiscal Court (BFH) decisions (from 07/06/2018 – VI R 13/16, BStBl. II 2019, 371; from 04/07/2018 – VI R 16/17, BStBl. II 2019, 373)

It has been reported that some tax authorities deny vouchers the characterization as a payment in kind even for the time before 1 January 2020 on the basis of two decisions by the German Federal Fiscal Court (BFH from 07/06/2018 – VI R 13/16, BStBl. II 2019, 371 ;  BFH from 04/07/2018 – VI R 16/17, BStBl. II 2019. 373) and thereby revoke any information on income tax they had previously given. In such cases, employers should, with the assistance of a tax advisor, examine the payment under consideration and, where appropriate, take action against the tax authority denying the classification as a payment in kind since neither of those two court decisions is based on the transfer of a voucher from an employer to an employee.


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