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Foreign Assignment - Tax

Definition, Explanation

When an employee is delegated abroad, also tax conditions may change, particularly regarding the income tax obligation respectively the deduction of wage tax by the employer.

Who is obliged to pay tax?

Generally, German tax law prescribes people to pay taxes to the country and county in which they reside or spend most of their time (see § 1 Abs. 1 EStG). If you or you and your family live in a place for longer than 6 months, then it is considered your main residence. The tax obligation is defined such that you pay all of your inland and abroad tax in that place. Therefore, your recipient of income tax deductions will be the new country when you or you and your family go abroad for a longer time when you work there (for longer than 6 months).

Often, though, people keep their German residence by commuting an having their family stay, or when the duration is below 6 months. In such cases it might happen that there are tax demands made on you by both the German revenue and the one of the country you work in. To avoid double taxation, there are certain countries with which Germany has entered into tax treaties.

Tax treaties (Doppelbesteuerungsabkommen)

Avoiding double taxation of seconded employees, Germany has entered into treaties with many countries. Normally, Germany leaves the right to tax to the country in which the activity is exerted. When tax is paid abroad, the activity is taxless within Germany, even if the family of the employee still resides here.

Special tax obligation back in Germany despite abroad assignment

Even if you work abroad, you might still be obliged to pay tax if:

• you spend fewer than 183 days of the calendar year abroad. The days counted include departure and arrival days, Saturdays, Sundays, Holidays, non-working periods due to sickness or lock-out or strike, and vacation on days before, after or in between the abroad days
• the remuneration is paid by an employer or facility within Germany and not within the workplace country

Tips, Checklist

• Think whether it would pay off for you to give up your living place, that is cancel your rented apartment or sell your own apartment/house. Your overall taxes may be lower if you do since you shift your place of residence. Short-term subleasing of up to 6 months does not count as residence shift because it allows you to immediately move back in. Also if you live abroad but your family or spouse remains living in Germany, your residence as for tax law will remain in Germany
• Besides having your place of residence changed, it is also crucial for how long you work in the other country. In order to pay your tax in the other country, you need to work there for at least 183 days getting your remuneration from the employer there
• If you plan to change your place of residence to another country, you should apply for exemption from German income tax (Freistellungsbescheinigung)
• The Freistellungsbescheinigung (income tax exemption note) is made for no longer than 3 years
• Get all the information about due tax payments at the revenue office responsible for your new working facility. Get certified that you are paying your tax there. You can hand in that certificate to the German revenue office when applying for exemption or partial proportional exemption from your German tax
• Have sorted out already in the beginning of your work abroad where you have to pay tax. Otherwise you might have to pay penalties, since you are obliged to have your remuneration taxed legally, yourself. It is not the obligation of your employer!
• Not only the remuneration payments but also holiday pay and Christmas money as well as commissions and variable income components are taxed. In case you have not been working in the other country for the whole year, those income components are taxed pro rata by the day
• As an employer, you must keep a tax exemption note of a German employee as a document of the pay account

Last update: 08/03/2010