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Back pay for overtime compensation as tax-deferred compensation for multiple years of service.
If current income coincides with extraordinary income that cannot be earned on a regular basis (e.g. compensation or remuneration for activities lasting several years) in a calendar year, this may result in additional charges due to the progressive tax scale. If the extraordinary income is paid out together in one year, taxation according to the so-called one-fifth rule (see Section 34 (1) of the German Income Tax Act (EStG)) is regularly considered. The beneficiary income is distributed evenly over five years in order to mitigate the progression effect.
The Münster Fiscal Court has ruled that overtime compensation paid out in a lump sum for several past years on the basis of a termination agreement is taxable under Section 34 (1) of the German Income Tax Act. 1 EStG are favored. According to the Tax Court, even mere back payments of earned compensation can lead to extraordinary income if the back payment period extends over (at least) two assessment periods and has lasted longer than 12 months.
In the opinion of the court, it is irrelevant that the sum of the remuneration received is made up of several amounts, each of which can be attributed to a specific individual year.
The Tax Court recognized the application of the one-fifth rule to overtime pay and allowed the appeal. Since the Federal Fiscal Court has expressly left open the question as to whether payments for overtime worked are eligible for collective bargaining, further developments may have to be awaited.