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Tax-free reimbursement for privately concluded mobile phone contracts is not an abusive arrangement!

17 February 2023

Roland Speidel, Certified Tax Advisor, Lawyer, Senior Manager, Department Tax & Legal |
Ronald Robbi, Certified Tax Advisor, Partner, Tax & Legal |

As is known, the provision of cell phones by the employer to employees is tax-free pursuant to § 3 No. 45 of the German Income Tax Act (EStG). However, what happens if the employee has concluded the mobile phone contract and the employer wants to cover the costs? This should be particularly interesting in the case of contracts with subsidized phones and high data volumes. In a recent ruling dated November 23, 2022 (AZ VI R 50/20), the Federal Fiscal Court (Bundesfinanzhof, BFH) issued a favorable decision for employees.

The facts of the case

The employer concluded purchase agreements with employees for their used mobile phones, with which it acquired the devices previously purchased privately by the employees. At the same time, the employer concluded a "Supplementary Agreement to the Employment Contract on Mobile Phone Costs" with the employees. Under this agreement, the employer provided the employees with a mobile phone and assumed the monthly costs of the mobile phone contract (basic fee, connection charges or flat fee) up to an amount specified in the agreement. The employees had to provide evidence of the costs of the mobile communications contract by submitting copies of invoices. After termination of the employment relationship, the employees were obliged to hand over the mobile phone. The employer reserved the right to "demand early return" of the mobile phone "in the event of a termination of the employment relationship" by the employee.

The decision of the German Federal Fiscal Court (Bundesfinanzhof, BFH)

The reimbursement by the employer of telephone costs for a mobile phone contract concluded by the employee is also tax-exempt pursuant to § 3 No. 45 EStG if the employer has acquired the cell phone, resulting in the use of which the telephone costs were incurred, from the employee at a low price, even below the market value, and immediately thereafter relinquishes the cell phone to the employee for private use.

Preliminary assessment of practical relevance

The BFH did not accept the tax authorities' objection that this was an abuse of the tax rules. This opens up some interesting potential for salary optimization in practice.

If, for example, an employee concludes a mobile communications contract including a subsidized cell phone at a purchase price of EUR 1 and a monthly basic fee of EUR 60 and subsequently agrees (observe the grace period) to transfer and return the device in return for payment of the purchase price and assumption of costs, this would have the following effect.

Tax exemption of the purchase price and the transfer back

If the transfer takes place within the "tax speculation period" of one year, it is at first sight a taxable disposal transaction. However, mobile phones are likely to be items of everyday use, the sale of which is exempt pursuant to § 23 (1) no. 2 sentence 2 of the German Income Tax Act (EStG). In addition, an exemption limit of EUR 599 applies (§ 23 (3) EStG).

Likewise, under the rulings of the BFH, the return of the mobile phone and the assumption of the mobile phone costs is tax-exempt pursuant to § 3 No. 45 EStG.

With its case law, the BFH opens up creative scope for net wage optimization. For the employer, the economic risk is reduced when the employee is exempt, since the employee continues to be a contractual partner of the mobile communications provider. However, the employer is denied the right to deduct VAT, as he is unlikely to be in possession of a VAT invoice issued in his name. This applies both to the purchase of the device and to the payment of the monthly fees.