FG Niedersachsen Case 8 K 66/22: Implications for Employers on Employee Farewell Events

The recent ruling by the Finance Court of Lower Saxony (FG Niedersachsen, Case 8 K 66/22) on May 14, 2024, has significant implications for the treatment of farewell events for employees with respect to income tax and social security contributions. The case specifically addressed whether the costs of such events, exceeding the 110-euro tax-free threshold, should be considered fully as taxable income or if they can be classified differently.

Key Aspects of the Ruling

1. Farewell Events as Corporate Events

The court ruled that a farewell event for an employee, even if it exceeds the 110-euro tax exemption limit, can still be considered a corporate event and not solely a personal benefit to the employee. The court rejected the tax authorities’ stance that costs over 110 euros per person should be considered fully taxable as income for the departing employee. Instead, the court held that only the portion of the costs attributable to the employee and their personal guests should be taxed as income, while the remaining costs related to other attendees (e.g., colleagues, management) are treated as business expenses.

2. Comparison to Birthday Celebrations

The ruling drew an interesting comparison to birthday celebrations, which are also considered corporate events under certain conditions, and are only taxable if personal benefits (such as costs for the employee’s family or private guests) are incurred. The court found that the same principles should apply to farewell events, dismissing the strict interpretation in the Lohnsteuer-Richtlinien (R 19.3 Abs. 2 Nr. 3), which classifies farewell events exceeding the 110-euro limit as fully taxable.

3. Partial Taxability

The court’s decision allows for a more nuanced view: only the portion of the costs attributable to the departing employee’s personal enjoyment (i.e., their personal guests or family members) should be subject to tax. The rest of the event, aimed at corporate recognition or the introduction of the employee’s successor, was considered to be in the employer’s interest, and thus non-taxable.

What Employers Should Consider

This ruling provides employers with greater flexibility in organizing farewell events without fearing excessive tax burdens for their employees. However, to ensure compliance, employers should:

1. Document Attendees and Costs

Careful records should be kept regarding the breakdown of costs for the event. Costs attributable to the departing employee’s personal guests must be separated from the costs for the general workforce or corporate invitees.

2. Keep Events within Corporate Interests

As long as the event serves a legitimate business purpose (e.g., the introduction of a new manager), employers can argue that the majority of costs should be classified as business expenses, rather than taxable income for the departing employee.

3. Consider the 110-Euro Exemption

Employers can still take advantage of the 110-euro tax-free limit per person for up to two events annually. If this threshold is exceeded, only the excess costs related to the employee’s private guests should be taxed, based on this ruling.

4. Review Internal Guidelines

Following this ruling, companies should review and potentially revise their internal policies regarding corporate events to ensure that the allocation of costs aligns with this legal interpretation.

Conclusion

The FG Niedersachsen ruling has made it clear that farewell events can be classified similarly to other corporate events, such as birthday celebrations, under tax law. Employers should ensure they maintain a clear separation of costs between those that benefit the departing employee personally and those that are purely business-related. This approach minimizes the taxable portion of such events while maintaining compliance with German tax laws.

For more detailed information or personalized advice, contact WW+KN, a Baker Tilly Company, at info@payrollgermany.de. We are here to assist you with all your payroll and tax-related queries.