By judgment 6 Afs 354/2023-48, the Supreme Administrative Court (hereinafter “the SAC”) decided on an appeal brought by the Financial Directorate of Appeal (hereinafter referred to as “the defendant”) against the judgment of the Regional Court, which upheld the action brought by a legal entity-employer (hereinafter “the plaintiff”) against the assessment of employment tax for the taxable years 2015, 2016 and 2017 on the grounds of failure to prove entitlement to exemption from tax pursuant to Art. 9(d) of the Income Tax Act (“ITA”) in respect of remuneration granted to employees in the form of points credited in the Cafeteria benefit scheme.

Core of the dispute

The core of the dispute was whether performance linked to work performed can be exempted from employment tax or whether wages in kind for work performed are always considered taxable wages without the possibility of using the exemption under Section 6(9)(d) of the ITA.

The plaintiff provided its employees with benefits in the form of points for the Cafeteria benefit scheme. Earning points was dependent on the fulfilment of pre-defined conditions, e.g. activity award, quality cup, best employee award, best team award, joining bonus or award for bringing a new employee. In addition, the plaintiff also awarded points to employees for life and work anniversaries and for the birth of a child. The points earned were subsequently redeemed by employees through non-monetary benefits.

However, according to the Appellate Financial Directorate (AFD), the purpose of Section 6(9)(d) is to exempt from tax only those benefits that are not connected with the performance of work and are provided in addition to wages, not instead of wages, which is why the AFD filed the appeal.

Arguments of the complainant

• In the argumentation, the complainant refers to the provisions of Section 6(9) of the Income Tax Act, according to which this provision applies to typical benefits provided to employees in excess of remuneration for work (i.e. not as wages), the so-called employee benefits. Conversely, it does not apply to benefits in the form of non-monetary remuneration for work (wages in kind). The modification of Section 6(9)(d) of the ITA is therefore intended to exempt from tax only those benefits that are not connected with the performance of work and are provided in addition to wages, not instead of wages.
• Specifically, the complainant considers that if the benefit provided by the employer to the employee is related to the work performed, it is taxable wages. The plaintiff linked the remuneration to the completion of certain work tasks, the achievement of set objectives or the duration of the work, i.e. the remuneration corresponded to the performance of the work or arose as a direct result of the work activity (i.e. it corresponded to the work actually done). It was not related to the mere (bare) existence of the employment relationship. For this reason, it was the provision of wages in kind for work done.
• According to the complainant, such a procedure is in fact regarded in practice as an attempt at tax optimisation, the primary aim of which was not tax savings, but above all avoiding the payment of compulsory insurance premiums. It cannot be accepted that the mere entering of wages in kind to a non-tax type of account automatically fulfilled one of the conditions for granting tax exemption under Section 6(9)(d) of the ITA.
• Finally, the complainant adds that such a mindset would lead to discrimination against publicly paid employees since they cannot receive a salary in kind. The complainant’s view is confirmed by the opinions of the General Financial Directorate, which state that only non-monetary benefits provided for a statutory purpose out of the employer’s non-tax deductible expenses are exempt from tax, and that wages in kind cannot be considered such benefits. The generally accepted interpretation is that this is income in excess of remuneration for work.

Conclusions of the SAC

• The SAC disagrees with the complainant’s assertion that a non-monetary benefit within the meaning of Section 6(9)(d) of the ITA can only be a benefit that is not linked to the quantity or quality of the work performed. According to the SAC, this is a condition created by the complainant which has no basis in the legislation. Section 6(9)(d) of the Income Tax Act does not distinguish whether or not a non-monetary benefit is or should be considered part of wages under this provision.
• The legislation is designed to work “only” with the concept of income, not wages. If a legal norm does not contain a specific rule, it is not possible to make up for this deficiency or to shape it instead of the legislator. In other words (in connection with the present case), if a tax norm does not contain a certain rule or condition at all, such a condition (here, moreover, to the detriment of the taxpayer) cannot be shaped beyond its actual wording.
• In the present case, the plaintiff’s attribution of points to the Cafeteria system was linked to a number of different situations, both related to the employees’ activities in the workplace and to purely personal events outside the employment relationship. However, according to the SAC, it was not essential how close the connection was to the work performed. The decisive factor was whether it was income and, if so, whether it was also exempt income.
• The SAC also disagrees with the complainant’s view regarding the plaintiff’s tax optimisation. The desire of tax subjects to reduce their tax (levy) liability is natural and not problematic in itself. The tax subject must, of course, stay within the limits of the law. In the case at hand, the constitutional principle that anyone may do anything that is not expressly prohibited by law is undoubtedly fully applicable, whereas the public authority may do only what the law expressly authorises it to do.
• In so far as the plaintiff complied with the statutory conditions of section 6(9)(d), which the tax authorities did not address at all in the previous proceedings, the plaintiff cannot be faulted for having used the legislation to provide non-monetary benefits to its employees, i.e. for the purpose it was intended to serve and under the conditions set by the legislature.
• Finally, the SAC states that the complainant’s reference to the opinions of the General Financial Directorate is not relevant. The opinions of the General Financial Directorate cannot impose new conditions on tax subjects beyond the scope of the statutory regulation, nor can they confirm the interpretation of the tax authorities, if it turns out to be incorrect. The objection that the exemption of payments to the Cafeteria system discriminated against employees paid from the State budget is also unfounded. In the case of state employees, the state is their employer and it is up to the state to set its remuneration policy, as it competes with private employers on the labour market.

Recapitulation

Based on the above, the SAC concludes that if the plaintiff decided to reward its employees in addition to their wages, she could have done so in monetary form. However, the plaintiff used the second option of remuneration by means of a non-monetary benefit, which is a method permitted and foreseen by law. The tax authorities have not raised any specific doubts that the plaintiff could not have done so or did not comply with the conditions for exemption. They argued only by reference to the private law concept of (wages in kind) for work done, but this (as explained above) was irrelevant. Thus, on the basis of that reasoning alone, the tax authorities could not deny the plaintiff an exemption from income tax in the form of points credited to the Cafeteria Benefit Scheme.

The SAC found no merit in the cassation complaint and therefore dismissed it.