Can an employee deduct income-related expenses incurred while receiving insolvency benefit (Insolvenzgeld)?
What is insolvency benefit?
If an employer is unable to pay all or part of their employees' wages due to financial difficulties, affected employees are entitled to insolvency benefit (Insolvenzgeld). This requires that insolvency proceedings have been opened against the employer. The purpose of insolvency benefit is to replace the wages that were not paid. The payment is made as a one-off transfer by the Federal Employment Agency (Bundesagentur für Arbeit).
Issue: Tax exemption of insolvency benefit
The insolvency benefit received by an employee in place of wages is exempt from income tax under § 3 Nr. 2 lit. b EStG. For the income tax return, however, it must be noted that this wage replacement benefit is subject to the progression clause (§ 32b Abs. 1 Nr. 1 lit. a EStG) and thus increases the overall income tax burden. The question is whether an employee who has received insolvency benefit can also claim expenses for journeys between home and the primary place of work during the period covered by the benefit. The difficulty here lies in § 3c Abs. 1 EStG, under which expenses directly economically connected with tax-free income may not be deducted as income-related expenses.
Example of receiving insolvency benefit
A was employed by B-GmbH, against whose assets insolvency proceedings were opened at the end of 2020. From January to March 2021, B-GmbH did not pay any wages to A. For this reason, A received tax-free insolvency benefit from the Federal Employment Agency for the stated period. In April 2021, A took up employment with a new employer.
In the 2021 income tax return, A claimed income-related expenses totalling EUR 1,300. Of this, EUR 360 related to journeys between home and the primary place of work in the period from January to March 2021 (during receipt of insolvency benefit).
BFH case law on bankruptcy compensation payments
Under § 9 Abs. 1 S. 3 Nr. 2 EStG, journeys between home and the primary place of work are deductible as income-related expenses from non-self-employed work, even if the employee receives bankruptcy compensation (Konkursausfallgeld). According to the BFH ruling, there is no direct economic connection between the contested income-related expenses and the bankruptcy compensation within the meaning of § 3c EStG (BFH, judgment of 23.11.2000, VI R 93/98, BStBl 2001 II p. 199). In the view of the BFH, however, precisely such a direct economic connection between the tax-free income and the expenses must exist for a deduction of income-related expenses to be excluded. According to the BFH, § 3c EStG therefore does not preclude the deduction of travel costs for journeys between home and the primary place of work. The reasoning is that the expenses were not incurred to generate the bankruptcy compensation; rather, the journeys served to perform the daily work duties owed. A deduction is therefore permissible.
BFH case law also applicable to insolvency benefit
The BFH case law on bankruptcy compensation applies accordingly to insolvency benefit (see Pust, HFR 2001 p. 433 and Fuhrmann in Korn, EStG § 9 marg. no. 163). Applied to the example, a deduction of income-related expenses equal to the travel costs would therefore be possible, even during the period in which insolvency benefit was received (January to March 2021).
It is important to note that this case law can also be applied to other income-related expenses of an employee that arose during the period of receipt of insolvency benefit, such as the acquisition of work equipment or depreciation on assets used for business purposes (see Pust, HFR 2001 p. 433).
Frequently asked questions
Frequently asked questions
Are work-related expenses deductible during receipt of insolvency benefits?
Yes, work-related expenses such as commuting between home and the primary place of work remain deductible during receipt of insolvency benefits (Insolvenzgeld). § 3c Abs. 1 EStG does not preclude this, as there is no direct economic link between the expenses and the tax-exempt insolvency benefits. The expenses serve the performance of work, not the generation of the insolvency benefits.
How is insolvency benefit (Insolvenzgeld) treated for tax purposes?
Insolvenzgeld is exempt from income tax under § 3 No. 2 lit. b EStG. However, it is subject to the progression clause (Progressionsvorbehalt) pursuant to § 32b Abs. 1 Nr. 1 lit. a EStG and therefore increases the tax rate applied to the remaining income. It is paid as a one-time benefit by the Bundesagentur für Arbeit (Federal Employment Agency).
What are the requirements for entitlement to insolvency benefits (Insolvenzgeld)?
Entitlement to Insolvenzgeld exists if the employer is unable to pay wages in full or in part due to financial difficulties and insolvency proceedings have been opened against the employer's assets. Insolvenzgeld replaces the unpaid wages and is paid out as a one-time payment by the Bundesagentur für Arbeit (Federal Employment Agency).
Which other work-related expenses are deductible during the receipt of insolvency benefits?
The case law on the deduction of work-related expenses (Werbungskosten) applies not only to travel costs but also to other professionally motivated expenses incurred during the receipt of insolvency benefits. These include, for example, the acquisition of work equipment or depreciation on business-use assets. The prerequisite is that there is no direct economic connection to the tax-free insolvency benefits.
What is the basis for deducting work-related expenses despite tax-exempt wage replacement benefits?
In its ruling of 23 November 2000 (VI R 93/98) on bankruptcy compensation (Konkursausfallgeld), the BFH held that § 3c EStG does not preclude the deduction of work-related expenses, as there is no direct economic link between the expenses and the wage replacement benefit. According to the prevailing view, this case law also applies to insolvency benefits (Insolvenzgeld).