The Supreme Tax Court once again decided on pension promises to a managing director who is also the majority shareholder of the employer company and specified in more detail the rules for distinguishing allowable business expenses from disallowable “hidden distributions”. In the case at hand the plaintiff received compensation for early termination of pension claims as a result of significant financial difficulties of the company.
As the state of employment, Germany has the right to tax a severance payment to the extent that the employee has exercised the activity in Germany. According to a decision of the Supreme Tax Court in the case of cross-border situations, the exclusion to tax benefits in kind from the exercise of share options and comparable rights under tax treaty law is based pro rata temporis on the place of employment of the employee during the vesting period (defined as the period in which the employee is entitled to acquire the options).
In a recent judgment the Supreme Tax Court decided that - according to Article 13 paragraph 1 of the double tax agreement (DTT) with France - Germany has the right to tax the severance pay as a result of the termination of an employment relationship insofar as the compensation relates to the period during which the employee (who was subject to unlimited tax liability at the time) lived and worked in Germany. The taxable amount must be calculated by considering the duration of the domestic residence compared to the term of the employment. The so-called cross-border commuter rule in Article 13 para. 5 of the DTT does not preclude Germany’s right of taxation.
The Supreme Tax Court decided that the waiver of a head physician of the right to private liquidation in return for monthly compensation payments made by the clinic owner to be able to bill privately insured persons himself is a taxable service and subject to VAT. Moreover, relinquishing the future right for private medical treatment does not fall under the medical services exemption as provided by national law.
The mutual termination of an employment is normally (also) in the interest of the employer. A severance payment made in return is therefore generally tax privileged. The Lower (regional) Tax Court of Hesse decided that this also applies in the event of an additional payment because of the (premature) termination of the employment relationship prior to the date as originally set in the termination agreement.
