Tax-exempt inflation compensation bonus of EUR 3,000 applicable as of today

The introduction of the inflation compensation bonus was decided by the Federal Cabinet on September 14, 2022. The Bundestag adopted the law on September 30, 2022. With the publication in the Federal Law Gazette (BGBl. I 2022, page 1743), the tax- and contribution-free disbursement is possible from October 26, 2022. The inflation compensation bonus’ tax and contribution exemption is limited until December 31, 2024. 

The introduction of Art. 3 No. 11c EStG (German Income Tax Act) allows employers to pay to their employees a compensation bonus of up to EUR 3,000 in order to mitigate inflation effects. The payment can be made in cash or in kind. Furthermore, the provision allows the payment of partial amounts or benefits up to such maximum amount during the benefit period. 

Key points and practical advice

• The benefit period starts on October 26, 2022 and ends on December 31, 2024. 
• The inflation compensation bonus applies per employment relationship. Accordingly, in case of a change of employer, the bonus may also be granted more than once during the benefit period. 
• The bonus is to be granted in a factual connection with the general price increase. In this context, it is advisable to prepare appropriate employee information for documentation purposes.
• If and to what amount the bonus is to be paid is at the employer’s discretion. Employees do not have any legal claim to the bonus’ disbursement. 
• The payment can also be made in partial amounts, as cash or non-cash benefit. 
• The benefit must be granted in addition to the generally owed wages. 
• The principle of equality under labor law must be observed.