Anyone who is resident in Germany but works abroad is often largely exempt from German income tax.
This is ensured by double taxation agreements, which Germany has concluded with most countries worldwide. However, the tax exemption is subject to strict requirements regarding the provision of evidence.
Evidence requirements for tax exemption on foreign wages: Notwithstanding the provisions of double taxation agreements, wages are only exempt from tax in Germany if the employee provides evidence that the wages have been taxed in the foreign country, or that this country has waived its right to tax them (see Section 50d(8) of the Income Tax Act (EStG), known as the ‘treaty override’).
Unfortunately, the law does not specify how this evidence is to be provided. The tax authorities, for example, require the submission of payslips or tax assessment notices, together with proof of payment. In exceptional cases, the tax authorities may also accept a certificate from the foreign employer.
The Cologne Fiscal Court (judgement of 16 June 2016, ref. 13 K 3649/13) was recently called upon to rule on such a case. During the proceedings, the taxpayer merely submitted a certificate from his Iranian employer. In this certificate, the employer confirmed that it had paid the Iranian tax due to the authorities. However, the certificate did not specify either the amount of the gross salary or the amount of tax paid.
The Tax Court did not regard this as sufficient evidence of the assessment and payment of the foreign tax and, as a result, treated the claimant’s wages as taxable in Germany, even though the work had been carried out abroad. This therefore led to a clear case of double taxation.
Our tip: Employees who wish to work abroad would be well advised to seek advice from an expert on the tax implications before they leave. Ideally, the necessary documents should be obtained whilst they are still abroad, as experience shows that it becomes difficult to do so retrospectively.