Can a "tip" totalling 1.3 million euros be tax-free? An employee received this amount from his employer's shareholder. The shareholder had sold his shares at a high profit and sent the employee a cheque for 1.3 million euros out of gratitude. The taxpayer classifies this as a tax-free tip.
Not every amount corresponds to a tip
According to Section 3 (51) of the Income Tax Act, tips that are paid to an employee by a third party voluntarily and without legal entitlement on the occasion of work performance are tax-free. However, payments to the business owner are not tax-exempt, as the exemption only applies to employees. The taxpayer was of the opinion that this was a tax-free tip, as he had received this as an employee and it was a voluntary payment from a third party. In the taxpayer's opinion, the law also does not limit the amount of the tax exemption.
The tax office did not agree with this view and rejected the objection. In its judgement of 14 December 2022 - 9 K 2814/20, the Cologne Tax Court, which was appealed to, followed the opinion of the tax office and did not consider the payment to be a tax-free tip. The law does not contain a definition of what is meant by a tip. However, the term is to be assumed according to common usage. The payment in the amount of 1.3 million euros clearly exceeds the scope of what can be considered a tip according to common understanding.
Jürgen Lindauer
Director, Tax
KPMG AG Wirtschaftsprüfungsgesellschaft
The tax rate may be lower in the case of a gift
The appeal was not allowed, meaning that the judgement is final. The taxpayer therefore has to pay tax on the payment, which results in income tax of 585,000 euros if the maximum tax rate of 45 per cent is applied. It would have been wiser to make a gift which, taking into account an allowance of 20,000 euros, would only have resulted in a tax burden of 30 per cent and therefore only 384,000 euros in gift tax.
