Farewell events can be tax-free

The farewell event in the case in question 

The Federal Fiscal Court was to decide on a case in which the employer put on a large reception to send off the chairman of the board and to present his successor. The farewell was organised entirely by the employer and its staff (particularly human resources). With the exception of eight family members, the guest list was entirely based on business criteria. The approximately 300 invited guests were made up of executives from the company as well as representatives from politics, business, business associations and the press. The costs were borne by the employer. 

An income tax audit evaluated the total costs as pay to the former chairman of the board, basing this on R 19.3(2) no.3 of the Income Tax Guidance. The Guidance lays down that when someone starts a job, or there is a change in a position or function or for an employee jubilee or a farewell for an employee, a non-monetary benefit does not come about if the employer’s expenses, including VAT, are less than 110 euros per person. If the amount exceeds this threshold (as it did in the case in question), the expenses are to be added-back in total to the employee’s pay.

The courts formulate clear differentiation criteria 

The Federal Fiscal Court confirmed its decision from 2003 (file ref. VI R 48/99; Federal Tax Gazette [BStBl.] II 2003, p. 725). An event is only of relevance to payroll tax if the employer assumes costs for a private celebration of the employee’s. If it is an “employer’s dinner”, on the other hand, the Federal Fiscal Court does not consider this to be a non-monetary benefit. Entertaining the departing staff member and his family members on the occasion of this kind of work dinner is not relevant for income tax either. 

The Federal Fiscal Court emphasised that a distinction is to be made on a case-by-case basis. The key criteria for the question of whether it is an event put on by the employer (alongside the reason for the event) are:  

• Whether the employer or the employee is the host
• Whether the guests are chosen by the employer or the employee
• The number of business and private guests
• The choice of venue (business or private environment)
• The character of the event. 

In the case in question, the Federal Fiscal Court classified the event as an employer dinner. A farewell event is above all the last act in the employee’s active work for his employer and is thus a work event. The Federal Fiscal Court thereby held to its earlier decision (judgement of 11 January 2007, file ref. VI R 52/03, BStBl. II 2007, p. 317) that attending a farewell event is in principle to be attributed to the sphere of work. The Federal Fiscal Court also considered that the form and the other criteria given above also argued in favour of an employer event.  

Relevance in practice beyond the individual case

Besides its confirmation concerning differentiation of private and work event the Federal Fiscal Court made the following statements with practical relevance: 

• The criteria mentioned above apply generally and are not just to be applied in relation to a certain cause (such as a significant birthday). They also apply to starting a position, changes to positions or functions, employee jubilees, and of course to farewell events. 
• The Federal Fiscal Court did not draw on the threshold of 110 euros per person introduced by the tax authorities in the Income Tax Guidance as a standard for differentiation.   
• The fact that family members attend a work celebration as defined above does not lead to a different assessment.
• For employees and their families to attend and be catered for at a work celebration does not result in taxable pay if this attendance is typical in society.

The Federal Fiscal Court thereby went far further than the equitable grounds of the tax authorities.

Employers should therefore make sure they follow the criteria given above when planning farewells and similar celebrations. The judgement can be used against the income tax audit if the audit considers the matter in a purely monetary way using the 110 euro threshold. 

Conclusion

All in all, the judgement strengthens the positions of employers. But is also shows how important it is to involve internal and external experts early when planning events. Companies with robust processes, which both provide for involving the tax department and for auditable documentation of planning documents, will profit the most from the judgement. Questions on this judgement or on farewell events at your company? We’ll be glad to be your contact. We’re looking forward to hearing from you!