If unused vacation time from several years is paid out to the heirs in a single payment after the death of an employee, this vacation compensation can be tax-advantaged under Section 34 of the German Income Tax Act (EStG). This was the ruling of the Munich Tax Court (Case No. 10 K 714/25).

The plaintiffs, heirs of an employee who died in 2022, sought to apply the reduced tax rate under Section 34 of the German Income Tax Act (EStG) to a vacation pay payment made in 2022. The employer had paid out compensation for 71 unused vacation days from the years 2020 to 2022. The tax office treated the payment as regular wages and denied the reduced tax rate.

The Munich Tax Court classified the holiday pay as remuneration for several years of service within the meaning of Section 34 Paragraph 2 No. 4 of the German Income Tax Act (EStG). The decisive factor was that the payment covered several assessment periods and extended over more than twelve months. The fact that individual holiday entitlements arose on a calendar-year basis did not preclude the assumption of several years of service. The crucial factor was the concentrated receipt of the entitlements earned over several years within a single assessment period.

The court expressly distanced itself from the jurisprudence of the Hamburg Tax Court, according to which vacation pay does not regularly constitute remuneration for multi-year activities. Such a view, the judges of the Munich Tax Court argued, is incompatible with the jurisprudence of the Federal Fiscal Court regarding lump-sum payments of overtime pay. Moreover, the lump sum payment in this case is based on compelling labor law reasons: Vacation pay is inadmissible during the ongoing employment relationship and only arises upon its termination, in this case, the death of the employee (Section 7 Paragraph 4 of the Federal Vacation Act).

Vacation pay accrued over several years is subject to the reduced tax rate under Section 34 Paragraph 1 of the German Income Tax Act (EStG). The Munich Tax Court has granted leave to appeal due to a deviation from the case law of the Hamburg Tax Court and the lack of a definitive ruling from the Federal Fiscal Court. This decision reinforces the view that vacation entitlements accrued over several years can be tax-advantaged if paid out in a single lump sum.