Workers’ employment no longer ends at the border. More and more employees are earning their living in a country other than their home country. In the case of the Avoiding double taxation In the States, the Double Taxation Agreement (DTA) plays a special role.
Cross-border workers are defined, on the one hand, as employees who establish a second residence at their place of work abroad and, on the other hand, as so-called „cross-border commuters“, who usually commute daily to their place of work abroad and back to their family home, and therefore do not have a residence at the place of work itself.
If an employee takes up employment in a country other than their country of residence, it is to be assumed that this will result in a double tax liability:
- Taxation of worldwide income in the country of residence – this is unlimited tax liability
- Taxation of wages in the country where the work is carried out – this is known as limited tax liability
- Dual unlimited tax liability upon establishing a second foreign residence
Generally speaking, from a German perspective, a distinction must be made between two scenarios, depending on whether Germany
- the State of employment (Case 1) or
- the country of residence (Case 2).
Case 1)
Employee A, who is resident in Poland, carries out some of his work for his Polish employer in Germany. He does not have a permanent residence in Germany.
A is subject to limited tax liability in Germany because he earns income here. Income tax is therefore deducted from his payslip. This income tax deduction has what is known as a ‘settlement effect’, meaning that it settles all of Germany’s tax claims against A.
As in this case neither the basic allowance, special expenses, child allowances nor income-related expenses are taken into account, but only the so-called employee’s flat-rate allowance of €1,000 and the flat-rate allowance for special expenses of €36, A could claim further income-related expenses and donations via the payroll tax deduction procedure using an official form. However, this would result in an obligation to submit a tax return.
Notwithstanding this, A is, of course, also entitled to apply for an income tax assessment here in Germany. Under this application-based assessment, pension contributions can be claimed in addition to income-related expenses; however, the foreign income is, so to speak, factored in to „buy“ this benefit.
Case 2)
Employee B, who is resident in Germany, works part-time for a French employer in Paris.
B is subject to unlimited tax liability in Germany, as he is resident here.
However, as Germany has agreed, under the terms of the treaty, to exempt income from employment carried out abroad, wages are taxed only in the country where the work is carried out, in order to avoid double taxation.
An exception applies to „cross-border commuters“. Contrary to the general rule, these workers are taxed in their country of residence.
With regard to the obligation to pay social security contributions, the so-called „territorial principle“ applies: in principle, an employee is liable to pay social security contributions in the country in which they carry out their work. Seasonal workers, on the other hand, are exempt from contributions if they work in Germany for no longer than three months and have another main job.
Contact at GWGL:
Gitta Lübbert (Luebbert@GWGL-Hamburg.de)