Is the employer’s assumption of professional liability insurance remuneration subject to wage tax?

Pursuant to Section 38 (1) sentences 1 and 3, (3) sentence 1 of the German Income Tax Act (“EstG”), employers must withhold wage tax from wages for the account of the employee each time wages are paid and pay it to the responsible tax office pursuant to Section 41 a (1) sentence 1 no. 2 EStG. Pursuant to Sec. 28e (1) Sentence 1 of the Fourth Book of the German Social Security Code (“SGB IV”), the employer is also obliged to pay social security contributions. Based on a reverse conclusion from Section 1 (1) Sentence 1 No. 1 of the German Social Security Remuneration Ordinance (“Sozialversicherungsentgeltverordnung” – “SvEV”), the assessment under social security law for benefits granted in addition to wages generally follows the assessment under wage tax law.

However, the correct calculation of remuneration subject to wage tax is not always easy for employers and is also fraught with risks. The employer is liable for the correct payment of wage tax and social security contributions. In order to avoid the obligation to make additional payments, it can pay off for employers to take a cautious approach by generously considering employee benefits as remuneration subject to wage tax. Employees, however, have an interest in ensuring that benefits paid by the employer are not subject to wage tax. In this way, employees receive more net from the gross.

The difficulties in correctly classifying employer benefits as remuneration subject to or exempt from wage tax are illustrated by the example of professional liability insurance for attorneys, insofar as the employer assumes all or part of the costs and premiums incurred for its employed attorneys.The amount of coverage can play a role, as can the scope of the insured activity.

Lawyers’ duty to take out and maintain professional liability insurance

The obligation to take out and maintain professional liability insurance follows from Section 51 (1) of the Federal Lawyers’ Act (“BRAO”). Pursuant to Section 51 (1) BRAO, a lawyer is legally obligated to take out and maintain professional liability insurance for the duration of his admission to the bar. The minimum coverage is required by law pursuant to Section 51 (4) BRAO. A violation of this obligation is sanctioned by non-admission to the bar pursuant to Section 12 (2) BRAO or by removal from the bar pursuant to Section 14 (2) No. 9 BRAO. The conclusion of professional liability insurance with corresponding minimum coverage is thus indispensable for the practice of the profession of lawyer.

Is the assumption of costs by the employer remuneration subject to wage tax?

If employed attorneys benefit from the full or partial assumption of costs or premiums for their professional liability insurance by their employer, the question arises as to whether sums spent by the employer for the professional liability insurance are to be counted as income from employment within the meaning of Section 19 (1) sentence 1 no. 1 of the German Income Tax Act (“Einkommensteuergesetz”, “EStG”) from the perspective of the employed attorney and are subject to wage tax or are exempt from wage tax. 

Pursuant to Sec. 19 (1) Sentence 1 No. 1 EStG, income from employment may include salaries and wages as well as other remuneration and benefits granted for employment in public or private service, regardless of whether there is a legal entitlement to them and whether they are current or one-off payments, cf. Sec. 19 (1) Sentence 2 EStG. The assumption of costs can thus also trigger wage taxable remuneration.

With regard to the wage tax liability in the case of assumption of contributions for professional liability insurance, the Federal Fiscal Court made the following distinction at the end of last year (BFH, ruling dated October 1, 2020 – VI R 11/18 and VI R 12/18):

• Assumption of costs to the extent of the obligation under Section 51 (1) BRAO limited to minimum coverage in Section 51 (4) BRAO

If an employer assumes the costs and premiums of a salaried lawyer for professional liability insurance within the meaning of Section 51 (1) BRAO to the extent of the minimum coverage under Section 51 (4) BRAO, the amount of the costs and premiums constitutes remuneration subject to wage tax, unless the employee has its own professional liability insurance that meets the requirements of Section 51 (1) BRAO and Section 51 (4) BRAO.

The question of when remuneration is subject to wage tax and when benefits are exempt from wage tax can be determined – in a highly simplified manner – primarily according to the interests at stake. If the assumption of costs is in the interest of the employee, the remuneration is subject to wage tax. In contrast, benefits do not have the character of wages if they are granted predominantly in the employer’s own interests. 

The legal obligation to take out professional liability insurance in the amount of the minimum coverage and to maintain the insurance during the period of admission to the bar primarily applies to the lawyer, regardless of whether he is employed or self-employed. The obligation is thus personal. In the opinion of the BFH, the assumption of the insurance contributions by the employer in the amount of the minimum coverage is thus primarily in the interest of the employee and not in the interest of the employer that is predominantly in his own business. 

Incidentally, the same applies to contributions to the bar association and to contributions for the beA. If the employer pays the amounts, this is remuneration subject to wage tax. 

Both obligations are linked to the person of the lawyer. Compulsory membership in a bar association exists regardless of whether the lawyer becomes self-employed or an employee after admission. As a chamber member, the lawyer is obliged to pay the chamber fee. The establishment of the beA and the associated financing contribution also follow directly from the admission to the bar.

• Assumption of costs to the extent of the obligation under Section 51 (1) BRAO above the minimum coverage in Section 51 (4) BRAO

The situation is different if the employer maintains professional liability insurance that meets the requirements of Section 51 (1) BRAO but exceeds the minimum coverage required by Section 51 (4) BRAO. If the employer pays the premiums for the higher coverage for employed attorneys, these premiums no longer constitute remuneration subject to wage tax, according to the BFH. In this case, the total premium to be paid by the employer is to be divided into minimum and higher coverage.

The higher insurance would predominantly serve the employer’s own business interests. The obligation of the employed lawyer to take out and maintain professional liability insurance can no longer be used to justify wage taxable remuneration for increased coverage. 

It is irrelevant if an employed attorney appears on the letterhead. Under insurance law, an employed lawyer is thus generally to be treated like a partner. However, it is decisive for the BFH that the employed attorney is not liable for attorney errors in the external relationship under civil law. 

An exception applies in the case of external liability under civil law. Such external liability can be considered, among other things, in the case of the so-called “pseudo-socius”, if, for example, the employed lawyer is personally liable to clients in every case of liability of the partnership according to the principles of legal appearance. However, such external liability of a pseudo-socius does not exist solely by virtue of the appearance on the letterhead.

• Assumption of costs outside the obligation under Section 51 (1) BRAO

If an employer maintains professional liability insurance in its own name and for its own account and if the insurance merely serves to cover the liability risk associated with the business, i.e. the employer’s own insurance coverage, the premiums to be paid do not constitute remuneration subject to wage tax if the employed lawyer must also take out professional liability insurance in the amount of the minimum insurance sum pursuant to Section 51 (4) BRAO in his own name and for his own account for any further legal work (e.g. freelance work) outside of the work for the employer.

Conclusion

With its decisions (BFH, ruling of 1.10.2020 – VI R 11/18 and VI R 12/18), the BFH has shed some light on the issue and provided employers with easy-to-understand guidelines for determining the liability to pay income tax. In particular, in the case of the assumption of costs for professional liability insurance pursuant to Section 51 (1) sentence 1 BRAO, the following catchy principle applies:

If a law firm, as the employer of a salaried lawyer, assumes the costs or premiums for a professional liability insurance policy that is not liable in the external relationship for a breach of duty by the lawyer, wages subject to wage tax are generally only present in the amount of the assumed premium share that is attributable to the minimum assessment basis prescribed in Section 51 (4) BRAO and that the lawyer needs to fulfill her obligation to insure pursuant to Section 51 (1) sentence 1 BRAO.

However, this means that new difficulties are inevitable for employers. If the coverage amount of the professional liability insurance exceeds the minimum coverage under Section 51 (4) BRAO and the employer pays a uniform sum/premium, the problem for the employer is to correctly determine the amounts attributable to the respective shares. However, the BFH requires such an apportionment. 

If the employed lawyer does not have his own insurance coverage, employers can either take out two different professional liability insurance policies (one for the minimum coverage and one for the higher coverage) or have the insurer inform them of the costs/premiums attributable to shares. If necessary, the ratio of the actual sum insured to the minimum sum insured could also be an appropriate allocation criterion.