Avoiding double taxation
In this context, double taxation should be understood to mean that the remuneration is taxed in two or more states for the same period if the place of work and place of residence are in two different countries. In this respect, overlapping taxation arises when one state taxes the world income of the taxpayer who is a resident (unlimited tax liability status) and the other state taxes the income that originates from its country (limited tax liability status). It is possible to avoid or limit this double taxation through various arrangements (specified in the respective double taxation agreement (DTA)).
Germany as the country of residence avoids double taxation by exempting income in conformity with the exemption-with-progression rule (Section 32b of the Income Tax Act [Einkommenssteuergesetz]). However, this presupposes that the income will be taxed in the foreign state. Moreover, instead of exempting the income, under certain DTAs (e.g. Denmark, Italy and Norway), the foreign taxes on income paid abroad are credited (Section 34c EStG).
Tax liability and tax deduction
Employees who are domiciled (Section 8 of the Fiscal Code [Abgabenordnung, AO]) or habitually resident (Section 9 AO) in Germany are subject to unlimited income tax liability in respect of the remuneration earned for their work performed abroad (Section 1(1) EStG). The employer then has to deduct tax in accordance with the individual payroll tax deduction criteria. This classification under Sections 8 and 9 AO, in particular, has to be comprehensively reviewed In practice. This is because, depending on the arrangements, diverging outcomes are possible that can also differ according to the countries to be considered (multiple domiciles, home office, powers of representation, family, duration of stay and the payment of the remuneration).
Employees who are not domiciled or habitually resident in Germany are subject to limited income tax liability on their domestic income from employment if their work is performed or realised in Germany (Section 49(1) no. 4a EStG).
DTA and exemption
The DTAs take precedence over national laws. If exemption is provided for in a DTA then it will be necessary to check if this would only be granted upon application (e.g. France, United Kingdom, Italy, Japan and Lichtenstein). If the DTA does not provide for an application then the employer would already be able to refrain from deducting payroll taxes if the preconditions stated in the DTA have been met. The tax office responsible for the operating units will issue exemption certificates upon request. If an employer allows the remuneration for work that was performed abroad to be tax exempt then the following should be taken into account.
- The remuneration that is subject to preferential tax treatment has to be shown separately from the rest of the remuneration in the payroll account and on the certificate of payroll tax deductions (Section 4 of the Payroll Tax Implementing Regulation [Lohnsteuer- Durchführungsverordnung, LStDV]).
- The exemption certificate has to be used as a supporting document for the payroll account (Section 4 LStDV).
- Employers are not allowed to carry out an annual adjustment of income tax for employees who received remuneration that was subject to preferential tax treatment at any point during the relevant calendar year; moreover, employers are also not allowed to calculate payroll tax for these employees on the basis of expected annual remuneration (permanent annual adjustment).
Please note: In this respect, the exemption certificate means that the employer is able to refrain from deducting payroll tax without incurring a liability risk provided that the circumstances described in the application match the subsequent procedure.
Attributing the remuneration
If, according to the DTA, the remuneration has to be exempted from tax in Germany then, first of all, it is necessary to check the extent to which it is possible to attribute this remuneration directly to the work performed abroad or the work performed in Germany. If it is not possible to attribute it directly then the remaining remuneration will have to be apportioned on the basis of activities.
Remuneration components that are paid directly on the basis of a specific service have to be allocated directly in advance (e.g. travel costs, overtime compensation, provision of housing in the country where the work is performed, etc.).
Components that cannot be directly assigned (e.g. regular salary, additional remuneration, such as a Christmas bonus, etc.) accordingly have to be considered, in the context of alternative apportionment, for regular payroll tax deduction; a distinction has to be made between:
- apportionment based on actual working days with the help of a forecast, or
- apportionment based on agreed working days. If, in a subsequent remuneration payment period, there is a change in the forecast in relation to the days then the newly determined apportionment criteria have to be applied from this time period.
Please note: What matters here is that the employer has to opt for one variant. Switching between methods during the course of the year is not permitted.
At the end of the year, the relevant days in Germany and abroad for the final apportionment will then ultimately be known. In the case of employees who are subject to unlimited tax liability, with year-round employment and where there has been no change in the tax class, the employer may make one single adjustment by using the annual tax deduction table up to the end of February of the subsequent year. In all other cases this has to be done on an exact monthly basis.
One-off payments, such as, for example, anniversary bonuses, likewise have to be apportioned if they constitute subsequent payments for earlier active work and the payment that is based on work performed abroad and in Germany is not applicable. For any tax exemption the important thing is not the payment itself but, instead, solely that it is paid to the employee for work performed abroad (according to the Federal Fiscal Court in its ruling of 5.5.1992 already, published in the German Federal Tax Gazette [Bundessteuerblatt, BStBl.] II. p. 660).
Please note: It will be even more difficult to assess other remuneration components, such as financial settlements, bonuses or option rights.
Recommendation: Given that there is a variety of possible constellations with respect to the cross-border deployment of staff and that here there are many exceptional sets of circumstances (duration of stay, affiliated companies, permanent establishments, etc.), if there are such plans, it would be advisable to get in touch with a tax consultant early on because the plans might also entail coordinating with the respective foreign countries. The other potential effects on social security, pension entitlements and the personal income tax situation etc. would possibly have to be assessed differently and, as urgent matters, would have to be included in the decision on the deployment of staff across borders.