The 5th rule can also be applied to the payment of overtime under certain conditions.
It is widely known that severance payments are made in the context of proceedings for protection against dismissal or by employers when notice is given. Although this is taxable income, it is extraordinary income pursuant to Section 34 (1) of the German Income Tax Act (EStG). Social security contributions are also not due. This income is taxed according to the so-called 5tel rule, which results in a lower tax deduction. Pursuant to Sec. 34 (2) No. 4 EStG, this income also constitutes extraordinary income if it is paid as a one-time payment for activities lasting several years. In the case to be decided by the BFH, a plaintiff worked for a GmbH in the years 2013 to 2015. During this time, he had worked a total of 330 hours of overtime, with each year accounting for approximately 114 hours of overtime. A termination agreement was signed in 2016. Among other things, this stipulated that the 330 hours of overtime worked in the past three years would be paid out in one amount. In his income tax return for 2016, the plaintiff stated in Annex N: "Compensation/work wages for several years." The tax office did not grant the rate reduction pursuant to Section 34 (1) EStG. The plaintiff filed an appeal against this, and successfully so. The BFH rejected the tax office's appeal as unfounded. The BFH confirmed that remuneration paid for activities lasting several years can be extraordinary income within the meaning of Section 34 (2) No. 4 EStG and consequently be taxed at a reduced rate. According to the wording of the law, an activity is multi-year "insofar as it extends over at least two assessment periods and covers a period of more than 12 months". Thus, the remuneration must be remuneration for a purpose for a multi-year activity and the remuneration must have been paid for a period of more than 12 months and spanning several assessment periods. The "multi-year activity" and thus purpose may be inferred from the occasion or from the circumstances. If any reference to the purpose is missing, then the calculation of the remuneration is examined. The remuneration must be for a multi-year activity, for economically reasonable reasons and in summary form. Consequently, back pay for previous assessment periods may also constitute extraordinary income.
The BFH is of the opinion that these principles also apply if, as in the case at hand, overtime compensation is paid in arrears, provided that the compensation is paid for a period of more than 12 months and across assessment periods. This was the case in the case to be decided for the years 2013 to 2015. Ultimately, the taxpayer should always benefit from the tariff reduction if special and extraordinarily high income is paid in an assessment period. This shows that an examination of the facts must always be carried out on the basis of case law.
If you have any questions on this topic, please contact attorney Claudia Frank, specialist in labor and tax law