Tax Advice

Inflation Compensation Premium Tax-Free from October 26, 2022

On Sep­tem­ber 30, 2022, the Ger­man Par­lia­ment re­sol­ved to in­tro­duce a tax-free in­fla­tion com­pen­sa­tion pre­mium. With the pu­bli­ca­tion in the Fe­deral Law Ga­zette on Oc­to­ber 25, 2022, em­ploy­ers will be able to make tax-free pay­ments to em­ployees contri­bu­ti­ons from Oc­to­ber 26, 2022.

Tax-free payment by employers

Spe­ci­fi­cally, the pro­mul­ga­ted law pro­vi­des that em­ploy­ers can pay their em­ployees a tax- and so­cial se­cu­rity-free al­lo­wance of up to EUR 3,000 to mit­igate in­fla­tion (Sec­tion 3 No. 11c Ger­man In­come Tax Act). The em­ployer is free to de­cide whe­ther and to what ex­tent such a bo­nus is gran­ted. All cash pay­ments and pay­ments in kind that are paid in ad­di­tion to the salary that would other­wise be due and that do not re­place other re­mu­nera­tion are eli­gi­ble for a bo­nus. In par­ti­cu­lar, this tax ex­emp­tion is ex­clu­ded in the case of a salary wai­ver or salary con­ver­sion.

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Ac­cor­ding to the ex­planatory me­mo­ran­dum to the le­gis­la­tion, the bo­nus can ge­ne­rally be clai­med on a pro-rata ba­sis for each em­ploy­ment re­la­ti­ons­hip. This shall also ap­ply to sub­se­quent em­ploy­ment re­la­ti­ons­hips with dif­fe­rent em­ploy­ers, pro­vi­ded that these are con­clu­ded in the fa­vored pe­riod.

Note: The equal tre­at­ment prin­ci­ple un­der Ger­man la­bor law must also be ta­ken into ac­count when pay­ing out the com­pen­sa­tion pre­mium.

Limited benefit period

Tax-free pay­ment of al­lo­wan­ces and be­ne­fits in kind is pos­si­ble from Oc­to­ber 26, 2022 to De­cem­ber 31, 2024.

As long as all pay­ments are made wi­thin this be­ne­fit pe­riod, em­ploy­ers can pay out the bo­nus up to an amount of EUR 3,000 free of tax and so­cial se­cu­rity contri­bu­ti­ons, eit­her as a sin­gle pay­ment or in se­veral in­stall­ments. This is in­ten­ded to pro­vide em­ploy­ers wwith fle­xi­bi­lity in terms of the ti­ming of pre­mium pay­ments.

Practical advice

In or­der to en­sure that the bo­nus can be cor­rectly clas­si­fied as a tax-free bo­nus pay­ment, it should be ac­coun­ted for se­pa­ra­tely and iden­ti­fied on the pay­roll.

In ad­di­tion, ac­cor­ding to the ex­planatory me­mo­ran­dum to the law, a con­nec­tion bet­ween the grant and price in­crea­ses must be made clear by the em­ployer, whe­reby no spe­cial re­qui­re­ments are im­po­sed. Pay­ment of the bo­nus for em­ployees should be as­so­cia­ted with a low le­vel of bu­reau­cra­tic ef­fort, this can be done in any form, such as a cor­re­spon­ding note on the re­mit­tance slip.

For re­asons of la­bor and tax law, we re­com­mend that the gran­ting of the bo­nus be ad­di­tio­nally fi­xed by a writ­ten notice to the em­ployees and that this do­cu­ment be kept avail­able for ques­ti­ons in the event of a sub­se­quent ex­ter­nal wage tax au­dit.

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