Germany: Foreign employees – tax aspects of sending employees

Christian Kracylo

Employment of foreign employees (“inbounders”) is continuously rising in Germany. This topic thus affects an ever-increasing number of German and foreign companies and raises all sorts of challenges for them. Regardless of whether these concern sending employees, hire of an inbounder or working activity in Germany within the scope of a business trip – each of these events has tax consequences. Comprehensive consulting is in place here – also from the viewpoint of ever increasing documentation obligations and guarantee issues.

Domestic tax obligation according to German tax law
The first step is the determination of the tax obligation according to German tax law. If an employee has a domestic place of residence or common residence, they have an unlimited tax obligation. This means that their worldwide income is subject to taxation in Germany.

Place of residence means exclusively an own flat; even an equipped room may be considered a place of residence. The term “common place” of residence applies if the employee has a domestic place of residence for a period of more than 6 months. This period is for example not interrupted by a short trip abroad and returning back. This issue is quite complicated, and it thus pays off to consult everything in detail with an independent consultant.

If the activities in Germany do not concern a place of residence or usual place of residence, the employee has a so-called limited tax obligation. In this case, domestically generated revenues – for example, wage for days worked in Germany – are subject to German income tax.

Agreement on the avoidance of double taxation
In the case of taxation according to German tax legislation, step No. 2 is the verification on whether potential double taxation cannot be avoided by the application of agreement on avoidance of double taxation.

As a rule, the working location principle applies in the case of income from employment. According to this principle, Germany has the right to impose tax if the activity was performed domestically. But there are exceptions under certain conditions. As an example, we can mention the 183 days rule. If an employee spends less than 183 days in the calendar year abroad and the wage is not paid to them by the economic employer or the place of business in Germany, then Germany does not have the right to impose tax. But it is necessary to be cautious because the right to impose tax is also subject to other conditions. In a given case, the relevant Agreement on the avoidance of double taxation and national regulations shall be applied.

Example of an employer’s wage tax obligation
If the employee is liable to pay tax in Germany, the employer must account the wage of the given employee in Germany, calculate and withhold the arising wage tax and transfer it to the German financial administration.

In principle, the tax is withheld in full from the employee’s wage in Germany if the employee has an unlimited tax obligation in Germany. If the employee has only a limited tax obligation in Germany, then Germany shall eventually be entitled to impose tax and only the wages for days worked in Germany shall be liable to wage tax.

Our recommendations – plan in advance and duly consult everything with a consultant
So that you can consider the tax consequences of sending employees and optimise them, we recommend that you plan everything in advance, it is especially necessary, for instance, to solve issues concerning tax obligations, set payroll accounting, prepare the relevant application and file it in advance. Apart from this, it is necessary to devote attention to the issues related to the stay and social security.

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