Inflation compensation premium free tax and social security contributions
Germany’s upper house of Parliament recently approved a measure that would give all employers the opportunity to provide their employees a special payment of up to EUR 3,000 as an inflation compensation premium, free of tax and social security contributions.
The inflation compensation premium is part of the "Act on the Temporary Reduction of the Value Added Tax Rate on Gas Deliveries via the Natural Gas Grid" and the so-called "Third Relief Package" from the federal government.
The law has been forwarded to the federal president for signature and will then be promulgated in the Federal Law Gazette. It will enter into force retroactively as of 1 January 2022.
According to the legal wording of §3 No. 11c German Income Tax Act, "Tax-free are [...] benefits granted by the employer in the period from 26 October 2022 to 31 December 2024 in the form of subsidies and benefits in kind in addition to the remuneration owed in any case to mitigate increased consumer prices up to an amount of EUR 3,000."
The basic prerequisite for tax and contribution exemption is that the benefit is provided in addition to an employee’s regular salary. Benefits paid by the employer for employment are only paid "in addition to the wages owed in any case" within the meaning of § 8 (4) German Income Tax Act if:
- The benefit is not offset against the entitlement to wages;
- The entitlement to wages is not reduced in favour of the benefit;
- The benefit for a specific purpose or use is not granted in lieu of a future increase in wages already agreed upon; and
- If the benefit is discontinued, the salary is not increased.
All the above conditions must be met.
The preferential treatment therefore does not apply if:
- A bonus is paid and in return the monthly wage or other bonuses or special payments are reduced;
- Bonuses, special payments or other salary components already owed are to be fulfilled "as a substitute" by the bonus; or
- The wage is temporarily reduced and is increased again after the inflation compensation premium has ceased to exist.
The inflation compensation premium is an allowance that benefits employees even if an amount higher than EUR 3,000 is paid. However, the portion in excess of EUR 3,000 is fully taxable and subject to social security contributions.
The bonus can also be granted in the form of a benefit in kind (for example, a voucher, a bicycle, a smartphone or a tablet).
Payment of the inflation compensation premium is voluntary for employers. Employees have no claim to the bonus; it is merely a favour under tax law in the event the bonus is paid. In order to be tax-exempt, the bonus must have actually accrued to the employee; that is, it must have been paid out by 31 December 2024 at the latest.
The benefit is valid from 26 October 2022 to 31 December 2024. The long period is intended to give businesses a high degree of flexibility. However, employers who would like to pay all or part of the inflation compensation premium to their employees this year need to act, as payment would have to be arranged for the December wage payment period at the latest.