Tax-exempt status of special COVID-19 payments even when offset against other voluntary employer benefits

Facts of the case

In the case in question, an employer made corresponding special COVID-19 payments to its employees during the eligible period. As in previous years, the employer also distributed special payments in the form of vacation pay or bonuses to its employees during this period. However, the employer treated a portion of the vacation pay or bonus payment as a special COVID-19 payment, resulting in a higher net payment of vacation pay or bonus due to its tax exemption. The external income tax audit questioned the tax-exempt status due to the lack of the required additionality criterion. Furthermore, it argued that neither the timing of the payment nor the amount of the payment indicated that the special payment was made in response to the particular work situation during the COVID-19 period.

Decision of the Federal Fiscal Court

The Federal Fiscal Court has confirmed that the special payment granted is tax-exempt. Benefits and grants are considered to be provided “due to the COVID-19 crisis” if they are granted by the employer to alleviate the burdens caused by the COVID-19 crisis. The law does not require a specific (individual) burden on the employee due to the COVID-19 crisis for the benefit to be tax-exempt. Given the widespread impact of the crisis, a COVID-19-related cause can always be assumed for special COVID-19 payments made by the employer during the standard period of the COVID-19 crisis.

In addition, the special COVID-19 payments were made in addition to the wages already owed. Pursuant to the temporarily inserted Section 8 (4), sentence 1, of the German Income Tax Act, benefits provided by the employer or - at the employer’s instigation - by a third party (non-monetary benefits or subsidies) in connection with employment are considered to be provided in addition to the wages already owed if, among other things, the benefit is not offset against the entitlement to wages or the entitlement to wages is not reduced in favor of the benefit.

Since this provision is intended to exclude salary waivers and conversions of wages that are owed in any event, the “claim to wages” must be understood to refer to the claim existing at the time of receipt and thus to the basic wages subject to income tax and social security contributions. Voluntary employer benefits are not part of the wages already owed. This also applies if an employer benefit based on a voluntary commitment (earmarked for a specific purpose) is repurposed. This is because even such a “conversion” does not alter the voluntary nature of the employer’s benefit and therefore does not affect the employee’s entitlement to the wages owed in any case.

Notice:

The Federal Fiscal Court’s confirmation of the view long held by tax experts provides legal certainty for all employers regarding past transactions. This effectively rules out any related discussions during external income tax audits concerning the special COVID-19 payments.

However, the principles confirmed by the BFH will also remain relevant in practice in the future, as they apply to all tax-exempt benefits that are provided in addition to the wages already owed. The much-discussed tax-exempt relief bonus - which, however, failed to secure a majority in the session of the Federal Council of Germany on May 8, 2026 - should also be structured in this way. The “additionality” requirement is generally the case if