Germany: Mobility budget - soon to be of interest to modern employers?

Unsurprisingly, the tax treatment of mobility budgets has so far been an obstacle to their widespread use. The current federal government now wants to remove this tax obstacle with its draft Annual Tax Act 2024 (in German) (the “Draft”). The declared aim is to expand the existing incentives to promote mobility that is as environmentally friendly as possible (p. 135 of the Draft).

The following article will show whether this is successful and what challenges this poses for companies.

What is a mobility budget?

A mobility budget offers employees the opportunity to use various mobility services within the framework of a budget previously agreed with the employer, regardless of the means of transport used. Use of the budget can be limited to business or private journeys.

Planned regulation for the mobility budget

The new Section 40 para. 2 sent. 1 no. 8 sent. 1 of the Income Tax Act (“EStG”) in the Draft version (“EStGE”) is intended to allow employers to pay tax at a flat rate of 25% on their own benefits or those provided to employees by authorised third parties from a mobility budget up to a maximum amount of EUR 2,400 per calendar year, provided that the benefits are provided in addition to the salary already owed (Section 8 para. 4 EStG (in German); i.e. deferred compensation is not favoured). According to Section 40 para. 2 sent. 1 no. 8 sent. 2 EStG-E, the mobility budget should include non-work-related mobility benefits that are granted as an allowance or non-cash benefit.

In addition to the purchase of (season) tickets for bus and rail transport, the planned new regulation should also cover forms of mobility that are only provided on a short-term, occasional and needs-based basis.

These include, for example, e- scooters, car sharing, bike sharing or transport services (e.g. taxis or Uber). However, the new regulation does not cover the permanent use of means of transport, the reimbursement of purely transport-related individual costs, such as petrol cards or repair services, aircraft, private motor vehicles and motor vehicles permanently provided to the employee (p. 135 f. of the draft).

Advantages of the mobility budget

The planned regulation on flat-rate taxation of the mobility budget expands the options available to employers for wage tax deduction.

One advantage is that tax-free employer benefits do not use up the flat-rate budget, but tax exemptions can still be utilised. Tax-free benefits include, in particular, the reimbursement of travel expenses (Section 3 no. 13 or no. 16 EStG), the granting of a job ticket (Section 3 no. 15 EStG (in German)) or a company bicycle (Section 3 no. 37 EStG).

From the employer's perspective, lump-sum payments also offer numerous other advantages:

• The relatively low flat-rate tax rate limits the additional costs for the employer when the flat-rate wage tax is usually paid. A net payment of other benefits that are not eligible for flat-rate tax is likely to be more expensive for the employer than the flat-rate tax rate of 25 %, given the necessary taxation according to the individual wage tax deduction characteristics. From the employee's perspective, this also represents a “tax-free” benefit from the employer, which promotes employee loyalty and thus also employee satisfaction.
• In return, the flat-rate taxed salary is exempt from social security contributions. The resulting savings for the employer average around 24% (provided the contribution assessment limits have not yet been reached). This makes lump-sum taxation attractive in many cases!
• In addition, the administrative burden for the employer is reduced because the tax rates of the employees do not have to be determined individually.
• A further simplification results from the fact that the employer's expenses can be used as the basis for calculating the flat-rate income tax in future (Section 40 para. 2 sent. 4 EStG- E). As a result, the usual final prices at the place of delivery, reduced by the usual discounts, no longer have to be determined as a rule, but the employer's expenses, which are often more favourable due to the bundling of the offer, can be used.
• Finally, the flat-rate mobility budget means that the non-cash benefit exemption limit of EUR 50 pursuant to Section 8 para. 2 sent. 11 EStG (in German) can be used for other benefits.

What must be taken into account when granting a mobility budget?

It should be noted that the mobility budget can also be taxed as a benefit in kind or allowance in accordance with Section 40 para. 2 sent. 2 no. 1 EStG. The employer must therefore choose which of the two provisions to invoke (Section 40 para. 2 sent.1 no. 8 sent. 4 EStG-E).

As flat-rate taxed employer benefits must be recorded in the payroll account in accordance with Section 4 para. 2 no. 8 of the Wage Tax Implementation Ordinance (LStDV) the records there must be used to decide which of the two flat-rate regulations to refer to when granting a mobility budget.

According to Section 40 para. 4 sent. 1 EStG-E, the exercise of all income tax lump sum options – i.e. also when applying the planned regulation – must now generally be carried out by submitting or filing a corresponding income tax return.

What problems remain unsolved?

The use of means of transport for business purposes at the employer's expense does not result in taxable wages for the employee. This leads to practical difficulties, particularly in the case of season tickets that can be used for both business and private purposes.

In the case of season tickets, business use is generally determined by means of an individual forecast for each individual employee at the time of the benefit or subsidy. In the cases of Section 3 no. 13 or no. 16 EStG (in German) or Section 3 no. 15 EStG, this is carried out as follows:

Firstly, the costs for single tickets are determined that would be incurred for business trips away from home or journeys to the first place of work without the use of season tickets. These are then compared with the costs of the season ticket. Only if the forecast costs for the single tickets equal or exceed the price of the season ticket is it assumed that the use is predominantly for business purposes and a tax-free reimbursement is possible. However, if the assumptions on which the forecast is based change significantly, this may result in a correction and possibly subsequent taxation, exposing the employer to an income tax liability risk.

For employers, the forecast often represents a considerable effort, which prevents the tax-free allowance or subsidisation of season tickets.

When utilising the mobility budget, it would therefore be desirable to have an easy-to-handle solution for determining the business share. In the legislative process to date, some flat-rate approaches (80% business and 20% private) have been proposed, flanked by the possibility of proving the actual share. Such a solution would be desirable and could give a significant boost to the importance of the planned regulation.

In addition, it is still unclear whether the valuation according to the employer's expenses pursuant to Section 40 para. 2 sent. 4 EStG-E will be adopted in VAT law or whether the valuations will differ in future, as Section 10 para. 5 sent. 1 no. 2 of the Value Added Tax Act provides for assessment according to the market usual remuneration.

Until the government draft is passed, it is therefore to be hoped that the existing regulation will be adjusted in this respect before the regulation on the flat-rate mobility budget comes into force with the promulgation of the law (probably at the end of 2024).

What do employers need to consider during implementation?

In the absence of a corresponding statutory provision in labour law that stipulates the entitlement to and requirements for a mobility budget, it is primarily up to the parties to the employment contract - namely the employee and the employer - to make the necessary agreements. In practice, these will usually be found in the employment contract itself or in corresponding supplementary agreements. It is advisable to take particular care with the documentation. This applies not only to the description of the conditions for utilising a mobility budget and the scope of the resulting entitlements, but also to a careful examination of whether and to what extent detachment rights appear sensible here and can be effectively agreed. In order to be able to react as flexibly as possible as an employer to any changes in the underlying tax law requirements, it is advisable to carefully weigh up how long you would like to commit yourself for and to consider a time limit or the agreement of a corresponding voluntary clause to exclude a future commitment. There are also special considerations when drafting employment contracts if other existing agreements (e.g. on the provision of a company car) are to be amended or cancelled when the mobility budget is granted.

On the other hand, employers who fail to document this or deliberately omit to do so run the risk of giving rise to unintentional claims arising from company practice for the future by making a mobility budget available (several times).

If a works council has been elected for the respective company, it is generally granted extensive participation rights in connection with the granting of a mobility budget. For its part, the works council cannot demand that the employer provides the employees with a mobility budget (the “whether”). However, if the employer decides to do so, the works council – depending on the specific organisation – has a say in the “how”. In these cases, the framework conditions for utilising the mobility budget will regularly be the subject of a works agreement. Particular attention is paid here to Sec. 87 para. 1. No. 1 (in German) (matters relating to the rules of operation of the establishment and the conduct of employees in the establishment) and No. 10 (in German) (matter of company pay structure) of the German Works Constitution Act.

As employees have no statutory entitlement to the provision of a mobility budget, it is basically up to the employer to decide not only whether it wishes to provide such a budget, but also which employees should be entitled to it. However, this selection may not be discriminatory in nature, nor may it constitute a violation of the principle of equal treatment under labour law, which in turn prohibits arbitrary unequal treatment of comparable employees.

The above statements are for initial information purposes only and are not a substitute for legal or tax advice.

Our research assistant Lara Salomon helped to write this article.