Section 37b of the German Income Tax Act (EStG) explained in simple terms: How to pay flat-rate tax on gifts, invitations, and incentives in a legally compliant manner – 7 key practical issues for companies

Gifts, invitations, and incentives play an important role in business life: they promote customer relationships, motivate employees, and strengthen company loyalty. However, such benefits often carry tax risks—especially if they are incorrectly valued or not taxed correctly.

Section 37b of the Income Tax Act (EStG) offers companies a simplified solution: they can tax certain benefits in kind at a flat rate of30% income tax (plussolidarity surcharge and church tax) on the gross value of the benefit. The key point is that the recipient—such as customers or employees— does not have to bear any tax burden themselves.

In this article, we highlight the seven most important aspects that companies should be aware of and take into account when applying Section 37b of the German Income Tax Act (EStG)—including practical examples, clarification notes, and tips for implementation.

1. Who benefits? – Scope of application of Section 37b of the Income Tax Act (EStG)

Section 37b of the Income Tax Act (EStG) can be applied to donations to:

• own employees (e.g., as a bonus, recognition, incentive),
• Third parties with whom we do business (e.g., customers, suppliers, business partners).

Example: You present a long-standing customer with a high-quality gift basket worth EUR 70. You pay a flat-rate tax of 30% on this gift in kind in accordance with Section 37b of the German Income Tax Act (EStG) – the customer does not have to pay tax on it.

⚠️ Important: Payments to shareholders or their relatives are subject to particularly critical scrutiny, as there is a suspicion of hidden profit distribution or gifting.

2. What is considered a benefit within the meaning of Section 37b of the Income Tax Act (EStG)?

This includes company-related benefits in kind, in particular:

• Gifts (e.g., wine, books, technology, gift cards),
• Invitations to events (e.g., trade fairs, concerts, sporting events),
• Non-cash rewards in bonus programs or sales promotions.

Not included are:

• Cash payments (e.g., cash bonuses, transfers),
• Grants with a corporate law background (e.g., to shareholders),
• Benefits that replace regular wages (for employees).

Example: An employee receives an e-bike as a thank you for a special achievement. The benefit in kind is granted in addition to the employee's salary and can be taxed at a flat rate.

3. The €10,000 limit – maximum annual limit per recipient

Flat-rate taxation pursuant to Section 37b of the German Income Tax Act (EStG) is only possible up to a total amount of EUR 10,000 gross per person and calendar year. If this limit is exceeded, the entire benefit is individually taxable —proportional flat-rate taxation is excluded.

Tip: Document gifts by recipient—e.g., in an internal list—to keep track of the limit.

4. Business expense deduction: When is the donation deductible?

Not every tax-privileged donation is automatically deductible as a business expense. The following rules apply:

Example: You give a customer a bottle of champagne worth EUR 60 gross. Since the net value exceeds EUR 50, neither the gift nor the flat-rate tax are deductible as business expenses.

5. Formal requirements & deadlines

Section 37b of the Income Tax Act (EStG) can only be applied if the following conditions are met:

• Uniform application to all similar benefits in the fiscal year,
• Declaration no later than in the income tax return for December, i.e. usually by January 10 of the following year.
• Complete documentation is required: name of the recipient, occasion, type, value, and date of the gift.

Tip: Check early in the year whether certain measures fall under Section 37b of the German Income Tax Act (EStG) – this will help you avoid unpleasant queries during tax audits.

6. Business seats, VIP boxes, and events—particularly sensitive from a tax perspective

Invitations to exclusive events such as soccer games, concerts, or gala evenings are popular—but complex from a tax perspective. Such events are not considered traditional gifts, but rather monetary benefits. However, they can be taxed at a flat rate under Section 37b of the German Income Tax Act (EStG).

🔎 Practical rule (according to financial administration): A flat-rate allocation of the total costs is permissible:

• 40% advertising
• 30% gift
• 30% hospitality

Example: You pay EUR 10,000 net for a business box. This results in:

• EUR 4,000 (advertising): fully deductible
• EUR 3,000 (entertainment): not deductible, but input tax is deductible
• EUR 3,000 (gift): non-deductible, input tax of EUR 570.00 non-deductible, flat-rate tax (30%) = EUR 1,071, also non-deductible

💡 Conclusion: Flat-rate taxation reduces the customer's tax burden, allowing them to enjoy the event without worrying about tax consequences.

7. Gift or customer event? – The important distinction

Not every event is a tax-relevant benefit. The purpose of the event is decisive:

Example 1: Invitation to a seminar followed by coffee → no gift in kind

Example 2: Invitation to a gala evening with dinner and entertainment program → Benefit in kind, § 37b applicable

✅ Conclusion: Flat-rate taxation creates legal certainty—when applied correctly.

Flat-rate taxation in accordance with Section 37b of the German Income Tax Act (EStG) offers companies the opportunity to make benefits in kind to employees and business partners simple, legally compliant, and attractive. It saves the recipient from a tax burden—provided that:

• the benefit is for business purposes,
• it does not exceed the €10,000 limit,
• all formal requirements are met.

Careful documentation and clear differentiation from other tax regulations, such as business entertainment or wages, are particularly important.

📞 Need advice? We're here to help!

Are you unsure whether Section 37b of the German Income Tax Act (EStG) applies to certain measures in your company? Or would you like to make your donation strategy legally compliant and economically viable?