Special COVID-19 Payments: Federal Fiscal Court Upholds Tax Exemption for Employers and Employees
During the COVID-19 pandemic, employers were able to grant their employees tax-free special payments of up to 1,500 euros. Many companies took advantage of this option—but in retrospect, tax authorities questioned the tax-exempt status in certain cases. A recent ruling by the Federal Fiscal Court (BFH) dated January 21, 2026, now provides clarity in favor of employers.
What was the case about?
An employer in the food retail sector had paid her employees tax-free special COVID-19 payments in May and November 2020. At the same time, she informed the staff that she would pay vacation pay in May and a bonus payment in November as voluntary benefits, as had been customary in previous years.
The tax office saw this as a problem: The special COVID-19 payments were not, in reality, additional benefits, but merely a tax-motivated reclassification of the voluntary payments that had already been planned. It demanded back income tax. The tax court of first instance shared this view.
How did the Federal Fiscal Court rule?
The BFH overturned the lower court’s ruling and ruled in favor of the employer. The reasoning can be summarized in three key points.
First, for tax exemption, it is sufficient that the employer specifically designated the payment as a special COVID-19 payment and made it in connection with the pandemic. Individual hardship or a particular need for assistance on the part of individual employees is not required.
Second, the BFH clarified that voluntary employer benefits—that is, payments to which there is no entitlement under an employment contract or collective bargaining agreement—do not count as so-called wages owed in any case. Rather, they are in addition to the regular salary. If an employer replaces a voluntary benefit with another voluntary benefit or offsets it against it, this does not affect the basic wage owed.
Third, in the BFH’s view, it is permissible for an employer to reclassify a voluntary benefit—such as a vacation bonus—as a special COVID-19 payment. The key point is that both benefits are voluntary payments that do not form part of the contractually owed wages.
What does the ruling mean in practice?
For employers who made special COVID-19 payments during the pandemic and offset them against other voluntary benefits, the ruling is good news. Provided the payments were correctly declared as special COVID-19 payments and disbursed within the statutory eligibility period (March 1, 2020, to March 31, 2022), the tax exemption remains in effect.
Anyone who has received a notice of additional income tax assessment regarding this matter in the past should check whether an appeal or correction is possible in light of this ruling. The BFH’s decision sets a precedent and is likely to be followed by tax authorities in comparable cases.
About Trimborn . Partner
Trimborn . Partner is a tax consulting and auditing firm with offices in Düsseldorf and Oberhausen. As experienced tax advisors for small and medium-sized businesses, we support companies with ongoing payroll processing, questions regarding the tax treatment of special payments, and assistance with external income tax audits. If you are unsure whether previous COVID-19 special payments were handled correctly in your company, please feel free to contact our tax advisory experts in Düsseldorf and Oberhausen.
