Article
Benefits in Kind for Employees – An Overview
(As at: Germany)
Definition: What are benefits in kind?
Benefits in kind are non-monetary benefits that employers provide to their employees independently of their salary. These must not be cash, nor may they be benefits that can be converted into cash. Typical examples include gifts, benefits in kind and tokens of appreciation on special occasions. Up to a certain exemption limit, these special benefits are exempt from tax and social security contributions for the employee.
In practice, benefits in kind are a popular way of boosting staff motivation. At the same time, they offer employers the opportunity to express their appreciation and gratitude towards their workforce. In many companies, these salary-independent benefits have become an important element of staff retention and recruitment.
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The maximum amount for non-cash benefits to employees
In principle, employers are free to set the value of benefits in kind for their staff. However, once a certain amount is exceeded, these benefits are subject to income tax and social security contributions. This involves additional administrative work. Furthermore, once the deductions have been made, there is usually not much left of the benefit in kind for the employees. It is therefore advisable to be aware of the exemption limits and to take them into account.
Types of benefits in kind
Gifts
This type of benefit is intended for a special personal occasion in an employee’s life. Gifts given at Christmas or New Year are therefore not classified as such benefits. Instead, this special benefit relates, for example, to the birth of a child, a wedding or a promotion. Benefits in kind of this kind are subject to an exemption limit of 60 euros, including VAT. If a birth and a promotion occur in the same month, the provision of two gifts is permitted.
Important: Gifts for personal occasions can be combined with standard benefits in kind without incurring tax or social security contributions.
Benefits in kind of all kinds
This category covers all non-cash benefits provided by employers. The maximum limit is 50 euros per month per employee, including VAT. Employees are permitted to make additional payments to ensure the exemption limit is not exceeded. If the benefit takes the form of a voucher, it must not be redeemable for cash. As well as a one-off benefit, this may also be provided on a long-term basis. Examples include a contribution towards a sports course or back training.
Important: It is not permitted to carry forward any unused amount to the following month. Conversely, promotional items – such as pens or notepads – valued at less than 10 euros are not counted towards the 50-euro limit.
Benefit in kind
This category covers benefits such as a company car or discounts on staff purchases. The tax-free allowance for this benefit is 1,080 euros gross per year. For the purposes of calculation, only the amount of the discount or the benefit in kind is relevant, not the actual value of the benefit. Special tax rules apply to company cars. For conventional cars, the 1 per cent rule applies, whilst electric cars are taxed at a reduced rate of 0.5 per cent.
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What does Section 37b of the Income Tax Act (EStG) state?
(As at: Germany)
Section 37b of the Income Tax Act (EStG) governs the flat-rate taxation of benefits in kind. Whilst paragraph 1 relates to benefits provided to business partners and employees who do not work for the company, paragraph 2 applies to benefits provided to the company’s own employees.
What are benefits under Section 37b of the Income Tax Act (EStG)?
This category of benefits in kind for employees includes all payments that employers provide to staff in addition to their regular salary. Components of the salary that have been converted into benefits in kind are therefore excluded. The same applies to cash payments. Instead, this provision relates to all benefits that are not classified as general non-cash remuneration, tokens of appreciation or benefits in kind.
The maximum limit per benefit and employee is 10,000 euros gross per year. Company benefits in kind under Section 37b of the German Income Tax Act (EStG) may be taxed at a flat rate of 30 per cent. This is an optional arrangement. There is therefore no obligation to apply flat-rate taxation. However, if it is to be applied, it must be applied to all employees of the company.
Important: The tax-free allowances for other types of benefits in kind remain unaffected by this flat-rate taxation and can still be claimed.
What must the employer subject to flat-rate taxation and how does flat-rate taxation work?
Flat-rate taxation under Section 37b of the Income Tax Act (EStG) is voluntary. It is up to the employer to decide whether this method of taxing benefits in kind is appropriate. Generally speaking, it is larger companies with many employees and an extensive incentive scheme that benefit from this approach.
If benefits in kind paid to employees are subject to a flat-rate tax of 30 per cent, employees must be informed that the tax is being paid by the employer. As the value of these benefits constitutes remuneration for work under Section 14(1) of Book IV of the Social Code (SGB IV), social security contributions, the solidarity surcharge and church tax are payable.
Only benefits that cannot otherwise be taxed at a flat rate are eligible for this type of flat-rate taxation of benefits in kind. Company cars and meals in the canteen are already subject to a flat-rate tax and cannot therefore be claimed under Section 37b of the Income Tax Act (EStG).
Conclusion
Non-cash benefits for employees are becoming increasingly popular in practice. Employers use them specifically to retain and recruit staff. They are not only a reward but also a sign of recognition. Non-cash benefits encompass all special benefits that employers provide to their staff in addition to their actual salary. As well as gifts and vouchers, this also includes company cars and meals at work. Provided the relevant exemption limits are observed, these benefits are exempt from tax and social security contributions. In addition, employers have the option of taxing certain non-cash benefits, both small and large, at a flat rate of 30 per cent.