Private Use of a Company Smartphone

According to a recent BFH ruling, the private use of a company smartphone is tax-exempt under § 3 No. 45 EStG even if the employer acquires the mobile phone from its employees for a symbolic price and subsequently provides it to them for use.

The Dispute

The plaintiff is a publishing house in the legal form of a GmbH & Co. KG. In 2015, it acquired privately purchased mobile phones from several employees for a symbolic price of one to six euros. At the same time, the plaintiff concluded a supplementary agreement to the employment contract with its employees, stating that it would provide the employees with a mobile phone and would cover the resulting costs (basic fees, connection charges or flat-rate fees) up to the agreed amount. The employees were required to substantiate the expenses by submitting their phone bills. Upon termination of the employment relationship, the employees were obliged to return the mobile devices to the plaintiff.

During a wage tax audit, the auditor concluded that the sale of the used mobile phones to the plaintiff constituted an abuse of tax structuring within the meaning of § 42 AO. She took the view that an unrelated third party would have sold the mobile phones to an employer at a market price and that the plaintiff had purchased the mobile phones solely to take advantage of the tax exemption under § 3 No. 45 EStG.

BFH Ruling

The BFH agreed with the plaintiff's view, so that the benefits of private mobile phone use are to be regarded as tax-exempt pursuant to § 3 No. 45 EStG.

Non-Cash Benefit

First, the BFH emphasised that the provision of a company mobile phone for private purposes generally constitutes a non-cash benefit. By being provided with a mobile phone for private purposes, employees are objectively enriched, since they save the costs that would otherwise have been incurred for privately providing a smartphone. However, this (non-cash) benefit granted by the plaintiff to its employees is tax-exempt under § 3 No. 45 EStG. The reason for the tax exemption is that the federal government wishes to promote the use and dissemination of the internet through personal computers and telecommunications devices.

Requirements – Tax Exemption under § 3 No. 45 EStG

First, the privately used mobile phones must qualify as eligible devices within the meaning of § 3 No. 45 EStG. Mobile phones fall under the category of telecommunications devices, the private use of which is expressly tax-exempt.

Employer's Company Device

In addition, the mobile phones must constitute the economic property of the employer. Since the plaintiff acquired the wireless devices from its employees in the year in dispute, it can be assumed that the devices are the plaintiff's business property.

No Sham Transaction

The plaintiff's economic ownership of the mobile phones could, however, be contested if it constituted a sham transaction within the meaning of § 117 BGB. A sham transaction exists where one of the parties makes its declaration of intent only ostensibly, both contracting parties agree on the sham character, and the agreed legal transaction therefore has no validity. According to the BFH, a sham transaction is to be excluded in the present dispute, since the conclusion of a valid purchase agreement was precisely the aim of the arrangement between employer and employees. Otherwise, the plaintiff would not have become the civil-law owner of the devices.

No Arm's-Length Comparison Required

The purchase agreement must also withstand an arm's-length comparison in terms of its validity. Contrary to the view of the tax authorities, however, the BFH rules out an arm's-length comparison in this dispute. In the BFH's view, there is a natural community of interests between the plaintiff and its employees. As a result of this community of interests, each contracting party safeguarded its own economic interests. In addition to selling their private mobile phones, the employees received the benefit that the employer reimbursed them for the costs of using their company mobile phone. Furthermore, there was no private relationship between the contracting parties that would render the symbolic purchase price objectionable. It should be noted, however, that the tax administration generally denies a tax exemption in the case of purchasing a mobile phone from employees at a symbolic purchase price, since the purchase agreement would not withstand an arm's-length comparison and therefore no company device would exist (LSt-Handbuch, H 3.45, Examples for the application of § 3 No. 45 EStG: Example 2).

No Abuse of Tax Structuring

In the BFH's view, the initially alleged charge of abusive tax structuring pursuant to § 42 AO also does not apply. Rather, the plaintiff's purchase of the private mobile phones from its employees represents a quick and simple way of obtaining company smartphones. Furthermore, the plaintiff intended for the devices to serve the business operations permanently, since the employees were required to return them at the end of their employment relationship. Moreover, the amount of the acquisition costs is irrelevant for granting the tax exemption under § 3 No. 45 EStG. Instead, the tax exemption can be used through the conclusion of the purchase agreements.

Note: Use of the SIM Card

The BFH also clarifies that the tax exemption under § 3 No. 45 EStG can only be claimed if the SIM card provided is installed in the employee's company device.