COVID-19 bonus laid down by law

On 5 June 2020, the Bundesrat [German parliament] adopted the First COVID-19 Tax Relief Act [1. Corona-Steuerhilfegesetz]. In addition to other tax regulations, such as those relating to loss carrybacks, the German Parliament in which the federal states are represented also adopted the legal framework for the "COVID-19 bonus". The introduction of section 3 No. 11a Income Tax Act [Einkommensteuergesetz - EStG] now ensures more legal certainty. The fiscal authorities also revised their FAQ "COVID-19" dated 5 May 2020. For employers and employees the revised version dated 6 June 2020 presents a first overview of the opinion of the fiscal authorities in doubts in connection with the granting of the "COVID-19 bonus".

The fiscal authorities intensively dealt with questions relating to the "additionality requirement". With the (continually valid) reference to the non-application decree dated 5 February 2020 (Federal Tax Gazette [BStBl] 2020 I p. 222) the fiscal authorities clearly state that in their opinion the positive case law of the Federal Fiscal Court should also apply in relation to the "COVID-19 bonus" (read our article dated 26 February 2020). Specifically, the fiscal authorities addressed the following cases - comparable with the previous version of the FAQ COVID-19 dated 5 May 2020:

Application of section 3 No. 11a EStG (COVID-19 bonus) instead of the common special payments

Application of section 3 No. 11a EStG (COVID-19 bonus) instead of other voluntary special payments

Inclusion of the COVID-19 bonus in compensation agreements

Connection of short-time working benefit and tax exempt benefits pursuant to section 3 No. 11 EStG

Treatment of the COVID-19 bonus in the payroll account and in the income tax return

The clarifications of the fiscal authorities are, in principle, to be welcomed. Unfortunately, however, the FAQs contain rather general statements. The new version did not provide the desirable clarifications. In particular in connection with reference to the additionality requirement, the previous entitlements need to be examined both in terms of payroll tax and employment law in order to avoid objections in future payroll tax audits.

There is a new explicit reference in the current version that the "COVID-19 bonus" is not subject to the progressive rate scale. Employees therefore do not need to fear corrective payments in the tax assessment process (other than for short-time working benefit) when this payment is taken into account in the calculation of the tax rate.

Practice note

Employers should therefore check in each individual case whether the bonus can be granted free of tax. Even if the tax authorities have a few requirements when it comes to proving the context between the granting of the bonus and the COVID-19 pandemic, they are of the opinion that not every arrangement is covered by the new legal regulation. Their requirements are more relating the proof that the tax exemption is not used instead of previously existing special payments or benefit programs of the company.