Landmark BFH Ruling: Tax-Free Status of COVID-Era Special Payments Confirmed

In a significant decision for both employers and employees, the German Federal Fiscal Court (BFH) has ruled that special “Corona” payments made to staff are eligible for tax-free status under existing pandemic-era relief laws. The ruling, issued in the case VI R 25/24, clarifies the interpretation of what constitutes “additional” compensation, providing much-needed legal certainty for businesses that issued special bonuses to mitigate the economic impact of the COVID-19 crisis.

The Legal Framework: § 3 Nr. 11a EStG

The dispute centered on the application of § 3 Nr. 11a EStG, a statute designed to provide financial relief during the pandemic. According to this law, employers were permitted to grant assistance and support to their employees in the form of subsidies or benefits in kind—up to a maximum of €1,500—on a tax-free basis. This provision was specifically applicable to payments made between March 1, 2020, and March 31, 2022, to help alleviate the burdens caused by the pandemic.

To qualify for this tax exemption, the law requires that the support be provided “in addition to the wages already owed” (zusätzlich zum ohnehin geschuldeten Arbeitslohn). This “additionality” requirement became the central point of contention between taxpayers and tax authorities.

The Dispute: “Additional” vs. “Converted” Wages

The case arose when a taxpayer, who operates several food retail stores, issued “Corona special payments” in May and November 2020. These payments were partially composed of converted portions of existing holiday pay and bonuses, intended to increase the net payout to employees.

The tax office challenged this arrangement, arguing that the payments failed the “additionality” test. Their position was that because a portion of the existing wages (such as holiday pay) was simply rebranded as a “Corona special payment,” the amount was not truly additional to the employee’s regular compensation. The tax office sought to tax these amounts at the employees’ average net tax rate. This view was initially upheld by the lower court (the Finance Court).

The BFH Decision: Protecting Voluntary Employer Contributions

The Federal Fiscal Court overturned the lower court’s decision, establishing a clear distinction between legally owed wages and voluntary employer benefits. The BFH’s reasoning focused on two critical legal principles:

• Definition of “Owed Wages”: The court clarified that “wages already owed” refers strictly to the basic salary and compensation that is subject to wage tax and social security contributions. Voluntary benefits provided by an employer do not fall into this category.
• The Effect of “Conversion”: The BFH ruled that even if an employer “converts” a voluntary, purpose-bound benefit into a different form (such as a Corona-specific bonus), it does not change the fact that the payment is additional to the base salary. As long as the employee’s original, contractually owed wage claim remains untouched and unreduced, the new payment satisfies the requirements of § 3 Nr. 11a EStG.

By this logic, the court determined that the “Corona special payments” were indeed granted due to the pandemic crisis and were provided in addition to the standard, legally required compensation.

Key Takeaways for Employers and Employees

The BFH ruling provides a vital precedent for how pandemic-related relief and other special bonuses are treated under German tax law.

Summary of Ruling VI R 25/24