25. February 2020

Tax treatment by the employee

The agreed conversion of future remuneration components into working time accounts generally does not lead to a wage tax inflow. This follows from the inflow principle of the same name. Accordingly, the tax liability does not arise until the employee has the economic power to dispose of the remuneration components. The prerequisite, however, is that the corresponding agreement relates to future remuneration, i.e. remuneration not yet due (BMF letter of 17 June 2009, IV C 5 – S 2332/07/0004). Following the BMF letter mentioned above, it is irrelevant whether the remuneration components due in the future have already been earned. This also applies if vesting periods of more than one year are involved in this context. However, it must be ensured that no agreements are made on the conversion of remuneration entitlements of employees with whom wage entitlements that are already available but not yet paid out are disposed of (e.g. overtime). This is because such a so-called “wage utilisation agreement” triggers a direct inflow to the employee from a (wage) tax point of view.

As a rule, regular and desired taxation takes place when the value credit is released (inflow). This takes place regularly during the exemption phase. The benefits must generally be taxed in full as income from employment in accordance with § 19 EstG (Income Tax Act).

If the employee leaves the company, the existing credit balance is normally paid out as a one-off payment. These payments are also subject to taxation in accordance with § 19 EStG and are therefore also to be classified as income from employment. At the same time, within this constellation, the employee can, in principle, use the so-called fivefold regulation in accordance with § 34 EStG for a possible tax advantage.

If a value credit is to be used for a company pension scheme on entering statutory retirement, this can, under certain conditions and depending on the chosen method of implementation, be done entirely or partially free of wage tax. If the credit balance of the current value account is reduced in whole or in part in favour of the company pension scheme on the basis of an agreement between employer and employee before the due date or at the time of the transition to retirement, this must be recognised for tax purposes as deferred compensation. In this case, the derecognition of the
amounts from the time value account does not lead to an inflow of wages. The timing of the inflow of these amounts depends on the tax requirements of the respective implementation method of the company pension scheme (BMF letter of 17.06.2009, IV C 5 – S 2332/07/0004).