In the retail sector, it is common for fashion brands to give away clothes (usually off-season or from runway shows) to their employees, or to sell the clothes to them at highly reduced rates. Both Marc Cain and Bogner, which are well-established high-level fashion brands, implemented this practice. However, in doing so, they overlooked the German tax implications of this practice.

What are the tax issues?

From a German tax point of view, donating clothes or selling them at discounted rates is considered as a benefit that is granted “in kind” to the company’s employees. As these benefits in kind always represent a part of the employee’s salary, wage tax and social security contributions have to be levied by the employer and paid to the competent tax office. VAT may also be payable on the withdrawal of assets from the company.

If such a case is picked up several years later, the company may have to pay considerable tax arrears on which interest is also due. The company may also have inadvertently committed a social security and a tax fraud, which may lead to additional fines and penalties. Finally, the company may have established company practice that obliges the employer in the future to give the clothing to the employees for free or at a highly reduced price. This may result in the company having to bear the full amount of tax and social security contributions.

Valuation issues

The most controversial issue is the determination of the value of the used clothes, which is generally based on the normal retail prices (at the point of sale), reduced by usual discounts. At the very least, there should be sufficient documentation to prove that these clothes had no value at the time they were handed over, or could only be sold to third parties at the price at which they have been handed over to the employees.

Moreover, there are certain tax allowances and flat-rate taxes which may be applicable and might even be advantageous for the employees. For example, work clothes or workwear are always tax free and exempt from social security contributions. Workwear may include expensive branded clothing if they are only worn during work.

These cases are a reminder that employers in the fashion industry have to be very careful with clothes or discounts granted to their employees.