No Child Exemptions with Flat Income Taxation

In certain constellations, the employer can choose to pay a flat wage tax for his employee when paying for other income next to the employee's normal salary. Such income often covers the costs for the private use of the company's car. The BFH judgment of July 26, 2007, re VI R 48/03 (published on August 15, 2007) had to decide whether the child exemptions ("Kinderfreibetrag") were to be applied for such flat taxation or not.


A GmbH organized for its employees conferences with entertainment as well as cultural components, which lead to wage taxation (§40 I 1 cl. 2 EStG). After a wage tax audit, and upon application of the company, the tax office assessed this wage tax totaling € 17,480. The child exemptions as mentioned on the tax cards were not taken into consideration when the flat wage tax was computed. A tax savings of about 1% would have been possible if the exemptions would have been considered.   The company did not to accept this and went to court and through all instances. Eventually, the Federal Tax Court decided the non-consideration of the child exemptions as correct. In its opinion, following the admendment of the law from 1996 (Familienlastenausgleichgesetz = Act to Harmonize Family Obligations). Pursuant to this act, child exemptions will not be considered anymore for wage taxation. The goal of the new law is to simplify the computation of wage taxation and this requires that the flat tax rate not be subjected to individual circumstances. Anything else would contradict §38a II EStG. This section of the Act says that wage tax is to be computed as if the employee would only obtain income from gainful employment.   The basic idea of Harmonizing Family Obligations can be seen in granting governmental child support or "Kindergeld" and child exemption ("Kinderfreibetrag"). Child exemption aims at securing the basic limit free of taxation. The governmental child support is a transfer payment. These are two different schemes of which only one can be applied at the same time. Your tax office will consider this fact ex officio whenever you "have children" on your tax card. The exact rules varied over the years corresponding to either a conservative or social-democrat government.


Published on the old CMS: 2007/9/18
Read on the old CMS till November 2008: 139 reads

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