No tax and social security contributions on Corona bonuses

In its letter dated 9 April 2020, the German fiscal authority offered employers an option to pay to their employees "corona bonuses" which are not subject to tax and social security contributions. Their purpose is a noticeable mitigation of the consequences at employee level.

Time limit and maximum amount

In the period from 1 March to 31 December 2020, employers can pay their employees tax-free grants and support due to the COVID-19 crisis up to an amount of 1,500 euro pursuant to Sec. 3 No. 11 Income Tax Act [Einkommensteuergesetz - EStG] in the form of grants and benefits in kind. This regulation is valid for all business sectors. It is therefore not limited to employees in "systemically relevant" jobs but applies to all employees in general.

Additionality requirement must be observed

As a prerequisite, the payments have to be made in addition to the wages payable in any event. The fiscal authority provided its opinion in relation to the term of additionality in the public notice of the BMF [Federal Ministry of Finance] dated 5 February 2020. According to this public notice,

1. the benefit must not be part of the entitlement to wages,
2. the entitlement to wages must not be reduced in favour of the benefit,
3. benefits for a specific use or purpose must not be granted instead of a previously agreed increase in wages, and
4. the wages must not be increased if the benefit is discontinued.

This is applicable with regard to the equality of taxation principle irrespective of whether or not the wages are subject to a collective agreement. Consequently, only genuine additional benefits by the employer are tax-privileged in wage tax and income tax law. At the bottom line, the "corona benefit" means additional financial expenditure for the employer. As a rule, arrangements where one-time payment commitments to employees (bonus, holiday pay) are reduced and replaced by tax-free benefits pursuant to Sec. 3 No. 11 EStG are therefore not covered by this regulation. Employers should therefore analyse for each individual situation whether the desired arrangement will be recognised for tax purposes and keep an eye on its implications in terms of employment law.  

Effects on short-time working benefit

The fiscal authorities expressly clarify that amounts paid by the employer on top of the short-time working benefit are not covered by this tax exemption, neither do extra amounts that an employer pays as a compensation on top of the short-time working benefit if income threshold is exceeded fall under the tax-exemption referred to above or under Sec. 3 No. 2a EStG.

Duty to keep records

Tax-free benefits are to be entered into the payroll account. Other tax exemptions, valuation allowances or flat-rate taxation options (such as Sec. 3 No. 34a, Sec. 9 (2) sentence 11 ("44 euro exemption threshold"), Sec. 8 (3) sentence 2 EStG (discount allowance) remain unaffected thereby and can continue to be claimed.