Compensation for clinical trial participants: Is this income subject to taxation?

When new drugs and vaccines are developed, comprehensive studies are conducted with the help of volunteer participants. Participants are also needed in the medical context for other purposes (such as training doctors). As a rule, participants receive compensation for their time and effort in the form of financial remuneration. One question that participants and medical professionals frequently ask is: Are the earnings from participating in clinical trials subject to taxation? The tax court also had to address this question after a lawsuit was filed in 2017. As of March 18, 2021, a ruling has been issued, providing a legally binding answer to this question. In this article, we will explain the background of the lawsuit, outline the ruling, and finally answer the question of whether subject fees are taxable.

The 2017 Dispute

Before we can address the ruling and thus answer the question, we must clarify the background of the legal dispute. In the relevant year of 2017, the plaintiff had participated in three studies. The studies involved a cream and two medications. For participating in the study, the plaintiff received compensation of 7,275 euros. A flat-rate travel allowance was also paid to cover travel expenses incurred as part of the study. Additionally, subject insurance was taken out for the plaintiff, providing coverage in the event of a study-related injury.

The tax office has now become aware of the plaintiff’s income and has subject it to taxation. The tax office cited Section 22(3) of the Income Tax Act (EStG) as the basis for taxation. This section establishes the tax liability “on income from benefits, insofar as such income does not belong to other types of income (Section 2(1), first sentence, Nos. 1 through 6) nor to income within the meaning of Nos. 1, 1a, 2, or 4.” The plaintiff, however, was of the opinion that the taxation was not justified. As justification, the plaintiff argued that the income constituted non-taxable compensation for pain and suffering due to health impairments and therefore could not be subject to taxation. So who is right? The tax court had to address this question.

The Tax Court’s Ruling

On March 18, 2021, a decision was finally reached in this legal dispute. The tax court issued a ruling, thereby clarifying the situation. The tax court ruled that the plaintiff’s activities within the scope of the study do indeed constitute a taxable activity under Section 22(3) of the German Income Tax Act (EStG). In this regard, the ruling confirmed that income from services under Section 22(3) of the German Income Tax Act (EStG) covers any act, omission, or tolerance that may be the subject of a contract for consideration. Furthermore, the success or failure of the study, as well as its premature termination, are irrelevant to the taxation of the subject’s fee. It was also noted that the duration and frequency of the activity have no bearing on taxation. Even a single participation in the study is sufficient to subject it to taxation under § 22 No. 3 EStG.

What does the ruling mean for the tax liability of subject fees?

With the tax court’s ruling, we now have an answer to the question of whether subject fees are taxable. The answer is unequivocally yes. With this ruling, the Tax Court has addressed various loopholes and grounds for doubt regarding tax liability. Test subjects for medical purposes must therefore assume that their income is subject to taxation. This knowledge is important because you must report the income to the tax office to avoid conflicts with the tax authorities. This case also demonstrates that, as a general rule, all income is identified by the tax office. Although compensation for participating in clinical trials is taxable income, there is an exception, as specified in Section 22(3) of the Income Tax Act (EStG). If the income from the study amounts to less than 256 euros in a calendar year, no taxes are due. In most cases, however, the income will be significantly above this threshold, which means it is subject to taxation.

Tax advice for tax gray areas and questions

In general, it must be noted that there are very few gray areas in tax law that are actually relevant for tax purposes. The legislature is very effective at closing any loopholes. Nevertheless, we repeatedly encounter certain tax issues and situations that raise questions for taxpayers. The plaintiff’s case also falls into this category. In some instances, as in this case, there is insufficient legal precedent and no relevant court rulings, which means the proceedings will take longer. Very often, however, certain legal issues have already been addressed in statutory texts or in comprehensive court rulings. A qualified tax advisor has a very good grasp of these matters and can advise you on the vast majority of ambiguities. To obtain an answer to questions regarding a specific individual case, you should therefore not contact your attorney directly, but rather consult your tax advisor first. Often, seemingly complex tax questions can be answered within a few minutes. So save yourself time and stress and consult an expert in tax law.

Your Tax Law Experts in Düsseldorf and Oberhausen

Do you have a question or concern regarding tax law? The team at Trimborn . Partner can assist you as quickly as possible with our many years of experience and professional expertise. Are you looking for a tax advisor? Then contact us. At our offices in Düsseldorf and Oberhausen, we are happy to assist you with all your tax-related matters.