The Provisions of § 37b EStG
Businesses may tax the following at a flat rate of 30%:
- business-related benefits to business associates and employees,
- which are provided in addition to services that are agreed in any case, and
- for gifts,
- that do not consist of money.
The new regulation arose from the following situation: benefits and gifts are in principle taxable income for the recipient. On the occasion of the FIFA World Cup in Germany in 2006, companies gave tickets to numerous business associates with the note that the recipients would have to pay tax on the tickets. As a result, many recipients returned the tickets.
Since 1 January 2007, § 37b EStG has enabled donating businesses to take on the tax liability for recipients by means of a flat-rate tax of 30%. In addition, solidarity surcharge (5.5% of 30%) and church tax (flat rate 7% of 30%) apply, so that the total burden amounts to 33.75%. By the donor taking on the tax, the tax liability on benefits and gifts for the recipient is eliminated. The flat-rate tax is calculated on the cost of the gift including VAT. Gifts remain deductible up to €35 per recipient per year as before.
Example 1:
Businessman A purchases a bottle of wine for €30 incl. VAT. Flat-rate wage tax 30% of €30 €9.00 Solidarity surcharge 5.5% of €9 €0.50 Church tax 7% of €9 €0.63 Total €10.13
Businessman A may deduct the cost of the bottle of wine and the flat-rate tax of €10.13 as business expenses.
Example 2:
Businessman B purchases a bottle of wine for €50 incl. VAT. Flat-rate wage tax 30% of €50 €15.00 Solidarity surcharge 5.5% of €15 €0.83 Church tax 7% of €15 €1.05 Total €16.88
Both the cost of the bottle of wine and the flat-rate tax of €16.88 are non-deductible business expenses, as they exceed €35. This regulation therefore leads to double taxation: the gift is not deductible for the donating company and, to cover the recipient's tax liability, flat-rate tax is additionally paid.
Details of § 37b EStG:
- The donating company may only exercise the option to take on the tax for business associates uniformly for all benefits and gifts in a given year.
- The following remain non-taxable as before: hospitality expenses, promotional items, low-value product samples
- The flat-rate taxation does not apply where expenditure exceeds €10,000 per recipient per financial year.
- The donor must inform the recipient of the assumption of the tax.
- Recipients must continue to be recorded by name as before.
- The flat-rate tax must be reported and remitted monthly with the payroll tax return.
Gifts to Employees
Gifts and benefits to employees may also be taxed at a flat rate under § 37b EStG. Such expenditure is deductible by the donating company regardless of the €35 limit, and accordingly so is the flat-rate tax. However, flat-rate taxation for gifts to employees is not permitted in the following cases: company events, perks for employees, company car provision, vouchers.