Insights
VAT
No VAT liability on reimbursement of training costs?
If an employment relationship is terminated by the employee, they may be obliged to repay training costs. This reimbursement no longer has to be treated as subject to VAT.
The reimbursement previously fell under VAT, meaning the employer had to invoice the employee for VAT when offsetting the training‑cost reimbursement. According to an answer to a query by the Federal Ministry of Finance (Bundesministerium für Finanzen, BMF) this legal view is no longer shared.
Training‑cost reimbursement
Employers can, under certain conditions, reclaim the costs of their employees' training when the employment relationship ends. A repayment obligation that is linked to the specific training measure must be agreed with the employee. The costs can then be reclaimed if the employee has acquired specialised theoretical or practical knowledge through the training. This knowledge must be usable in another company or in self‑employment and must objectively give the employee better chances on the labour market.
If this has been agreed, the employer can primarily reclaim course fees, travel expenses and wage costs incurred during the training from the employee. Ultimately, the claim requires a termination of the employment relationship caused by the employee within a certain period after the training has taken place. The period must be reasonable and is normally limited to a maximum of four years. The repayment amount decreases monthly and linearly as the binding period elapses.
From a VAT perspective, the reimbursement of training costs has previously been subject to VAT. This follows from earlier case law, as a service exchange exists between employer and employee. The employee receives training and the employer receives consideration for a service. The employee’s compensation payment is not considered (genuine) damages. For the employee, the repayment increased by the amount of VAT.
Non‑taxable damages
In a query to the BMF it was asked whether, for employers not entitled to deduct input tax (e.g. a bank), a double taxation could arise in connection with a training‑cost reimbursement, because the employer cannot claim input tax for the training but would still have to charge and remit VAT on the reimbursement. The BMF states that, for a training‑cost reimbursement payable due to a termination, there is no direct link between the payment of the reimbursement and a service provided by the employer. Rather, it is a non‑taxable damages payment. Genuine damages are paid on the basis of a statutory or contractual obligation to compensate for a loss.
Note
The BMF’s answer reaches a surprising result that contradicts previous case law. As an answer to a query by the BMF does not have legal binding effect but merely reflects the tax administration’s view, the BMF information should be considered critically. The Federal Fiscal Court (Bundesfinanzgericht) is not obliged to follow the tax administration’s view.
Training‑cost reimbursement
Employers can, under certain conditions, reclaim the costs of their employees' training when the employment relationship ends. A repayment obligation that is linked to the specific training measure must be agreed with the employee. The costs can then be reclaimed if the employee has acquired specialised theoretical or practical knowledge through the training. This knowledge must be usable in another company or in self‑employment and must objectively give the employee better chances on the labour market.
If this has been agreed, the employer can primarily reclaim course fees, travel expenses and wage costs incurred during the training from the employee. Ultimately, the claim requires a termination of the employment relationship caused by the employee within a certain period after the training has taken place. The period must be reasonable and is normally limited to a maximum of four years. The repayment amount decreases monthly and linearly as the binding period elapses.
From a VAT perspective, the reimbursement of training costs has previously been subject to VAT. This follows from earlier case law, as a service exchange exists between employer and employee. The employee receives training and the employer receives consideration for a service. The employee’s compensation payment is not considered (genuine) damages. For the employee, the repayment increased by the amount of VAT.
Non‑taxable damages
In a query to the BMF it was asked whether, for employers not entitled to deduct input tax (e.g. a bank), a double taxation could arise in connection with a training‑cost reimbursement, because the employer cannot claim input tax for the training but would still have to charge and remit VAT on the reimbursement. The BMF states that, for a training‑cost reimbursement payable due to a termination, there is no direct link between the payment of the reimbursement and a service provided by the employer. Rather, it is a non‑taxable damages payment. Genuine damages are paid on the basis of a statutory or contractual obligation to compensate for a loss.
Note
The BMF’s answer reaches a surprising result that contradicts previous case law. As an answer to a query by the BMF does not have legal binding effect but merely reflects the tax administration’s view, the BMF information should be considered critically. The Federal Fiscal Court (Bundesfinanzgericht) is not obliged to follow the tax administration’s view.