FinVerw publishes FAQ on inflation compensation premium
March 13, 2023
The FinVerw has published an FAQ on the inflation adjustment premium (IAP). To mitigate the consequences of the sharp rise in prices, the legislator has created the possibility for employers to pay their employees a tax- and contribution-free “inflation adjustment premium” of up to € 3000. The payment of such a bonus is voluntary, but may be agreed upon in collective agreements. The FinVerw states the following in particular:
- Beneficiaries: Only employees for tax purposes can receive a tax-free IAP, regardless of the type of employment. However, if an employee is classified as such for tax purposes, there is no further restriction. The following can be named: Full- or part-time employees, short-term employees, mini-jobbers, temporary workers in agriculture and forestry, trainees, employees on paid internships (not only, but also students), employees on short-time work, employees on parental leave, employees receiving sick pay, volunteers as defined in §2 Federal Volunteer Service Act and volunteers as defined in §2 Youth Volunteer Services Act. §2 of the Youth Volunteer Service Act (Jugendfreiwilligendienstegesetz), persons with disabilities working in a workshop for disabled persons, volunteers, provided that the definition of an employee for tax purposes is fulfilled, board members and shareholder-managers, provided that the definition of an employee for tax purposes is fulfilled, employees in the active or passive phase of partial retirement, recipients of early retirement benefits, recipients of pensions.
- Employment relationships between related persons, e.g. spousal employment relationship: The prerequisite for the tax recognition of such an employment relationship is that it is seriously agreed and actually carried out in accordance with the agreement. Furthermore, it is assumed that the contracts have been validly concluded under civil law and that their content corresponds to what is customary between strangers. In the case of employment relationships between related persons, it must be examined in particular whether the granting of an IAP would also be customary between strangers (arm’s length principle).
- The beginning and duration of the employment relationship are not relevant for the possibility of granting the tax exemption. However, the payment must be made in the qualifying period.
- Amount of tax-exempt IAP: The tax exemption applies to payments in the benefit period 26.10.2022 to 31.12.2024 for corresponding payments up to a total of € 3000. Payment in several instalments within this benefit period is possible. If the amount of € 3000 is exceeded, the excess amount is taxable.
- Several employment relationships: The tax exemption can be claimed separately up to the amount of € 3000 for each employment relationship, i.e. also for successive or coexisting employment relationships. This also applies to several employment relationships with different employers of affiliated companies within a group. The employer therefore does not need to check whether the employee has already received a bonus from another employment relationship with another employer. However, the tax exemption only applies up to the amount of €3000 in total in the case of several consecutive employment relationships in the benefit period with the same employer.
- Conditions permitted under labour law: If the granting of the IAP is linked to conditions permissible under labour law, such as length of service, membership of a particular department or a successful probationary period, this is harmless from a tax perspective.
- Connection of the benefit with inflation: The benefit must be granted to compensate for increased consumer prices (inflation reference). A corresponding (written) agreement between employer and employee is not required. It is sufficient that the IAP has a factual connection with the price development and that the connection is evident, e.g. in the form of the designation “inflation compensation premium” from the salary statement or from the remittance slip.
- Premium commitment before 25.10.2022: The decisive factor for tax exemption is exclusively the payment in the benefit period 26.10.2022 to 31.12.2024. It is harmless if the decision to pay the premium was already made before this period.
- Additionality requirement: The benefit must be granted in addition to the remuneration owed anyway, i.e. the tax exemption only applies to a “new” benefit provided by the employer. Therefore, the employer cannot “reclassify” a special benefit, such as a Christmas or holiday bonus, to which the employee is already entitled, into a tax-exempt IAP. The same applies to the reclassification of overtime to which a payment entitlement exists. In contrast, voluntary fringe benefits, to which the employee is not entitled under labour law, can be paid out as IAP. Even if the employee, in return, waives the right to time off in lieu of overtime or if overtime is reduced to which the employee is not entitled to payment, the requirement of a payment “in addition to the wages owed anyway” is fulfilled in these cases.
- Effects on the €50 exemption limit for benefits in kind: Tax-free benefits, such as the IAP in this case, are not to be included in the examination of the € 50 exemption limit for benefits in kind.
- IAP for mini-jobs: The tax-free IAP can also be granted for mini-jobs that are taxed at a flat rate.
- Tax treatment of the IAP for the employee: The tax-free IAP is neither to be shown by the employer in the wage tax certificate nor to be declared by the employee in the income tax return. It is not subject to the progression proviso.
- Employer’s record-keeping obligations: The tax-exempt IAP must be recorded in the wage account so that it is recognisable as such during the external wage tax audit and the correct application of the tax exemption can be checked if necessary. The connection of the granting of benefits with inflation can result from individual or collective agreements between employer and employee, from similar agreements, from declarations by the employer or from a legal regulation (e.g. salary law).
- Social security contributions: The tax-free IAP is exempt from social security contributions.
- Attachability of the IAB: The attachability of the IAP is not regulated and in particular not restricted in the Income Tax Act. Therefore, it is subject to the applicable regulations of the Code of Civil Procedure on the attachability of claims (especially earned income).
Recommendation for action: The IAP, which is exempt from tax and social security contributions, offers comprehensive possibilities for employees to receive additional benefits. However, the few preconditions must be carefully observed.