Large payments to authorized signatories not tax exempt
Payments made to employees amounting to 1.3 million euros, or even “just” 50,000 euros, do not constitute tax-free tips. That was the verdict of Cologne’s fiscal court – the Finanzgericht (FG) Köln – in two judgments published on November 27, 2023 (case nos.: 9 K 2507/20 and 9 K 2814/20).
While you would be hard-pressed to find an employee who does not welcome extra pay or benefits from their employer, it is important to remember that these may be subject to taxation, notes an expert in tax law at MTR Legal Rechtsanwälte.
Company gives “tips” to authorized signatories
It sounds like something out of a movie. A company with a stake in a GmbH – a type of German limited liability company – pays two authorized signatories generous “tips”. That is at least how it described the payments, one of which was as high as 1.3 million euros and the other 50,000 euros. And that is also how the authorised signatories themselves categorized the payments in their tax returns. It should be noted here that tips are tax exempt under German law. The authorized signatories argued that these were payments to which they had no legal claim and which had been made by a third party voluntarily, in addition to the wages they had received from the GmbH acting as their employer.
Fiscal authorities took a different view
However, the tax office was not having any of it. Far from viewing the payments as tips, it treated them as taxable wages, stating that voluntary bonus payments from affiliated companies are not tax-free tips. This view was later shared by the FG Köln, which dismissed the authorized signatories’ legal action to appeal the tax assessment notice.
Payments not in line with general definition of tips
The court held that the size of the payments alone precluded them from being considered tips, let alone the circumstances as a whole. The fact that the tax-free limit for tips has since been abolished should not be seen as an opening of the floodgates to large tax-free tips. There is still a general understanding of what constitutes a tip, and payments of 50,000 and 1.3 million euros clearly go beyond the scope of this term, according to the FG Köln. Tips, the court went on to explain, are typically paid to service providers such as waiters, taxi drivers, and hairdressers, all of whom are accustomed to receiving significantly smaller payments. Large gifts of money, the court stressed, do not constitute tips. The ruling is final.
Anyone who finds themselves at loggerheads with the fiscal authorities or who has questions relating to tax law need look no further than MTR Legal Rechtsanwälte.
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