Due to the increasingly international orientation of companies, it is becoming more common for a company based abroad to temporarily employ one or more employees in Germany – even without having a branch in the compnay. May it be, for example, for on-site consulting or for the development of market expansion. However, there are several things to consider when posting employees to Germany. In particular, the differences in tax systems can cause difficulties for both employers and employees.
The specific design of the deployment in Germany is of decisive importance for answering the questions arising. For example, it is crucial whether the posting of employees to Germany is limited in advance and how long it will last. For comprehensive and competent legal advice, please contact our lawyers directly.
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Income Tax and the Deduction Procedure
If a foreign company deploys employees to Germany, the question arises of where the income tax is to be paid. This issue depends on which state has the right to taxation.
In principle, the German state is entitled to taxation concerning the income of foreign employees if they carry out their work in Germany (§ 1 (4), § 49 (1) No. 4 lit. a) of the German Income Tax Act, EStG). Deviations from this principle may be laid down in so-called double taxation agreements (DTAs). It must therefore be checked whether Germany has entered into a DTA with the state from which the posting is made.
Double taxation agreements serve the purpose of avoiding double taxation and also double non-taxation. They assign the right of taxation in international tax matters to one of the states involved and regulate the extent to which the right of taxation of the other state is restricted. For example, Article 15 of the existing DTA between Germany and the USA stipulates that the state where the activity is carried out is entitled to taxation for remuneration. Thus, if the work is carried out in Germany, the income tax must, in principle, be paid here. In this respect, the DTA confirms the principle mentioned above applicable in Germany.
However, an exception may be made if the employee stays in Germany for less than 183 days during the calendar year in question. A further condition is that the remuneration is paid by or on behalf of an employer not resident in Germany. Furthermore, the remuneration may not be borne by a permanent establishment or a fixed base located in Germany. In this case, the revenue is taxable in the state where the employee is resident. The main criterion for determining the state of residence is primarily the domicile or centre of vital interests and the habitual abode (Art. 4 DTA USA).
In this way, the international taxation regulations of DTAs are usually structured. However, it must be examined in the individual case whether a DTA exists and how its provisions will appear. But it can be stated that, as a rule, income taxes must be paid in Germany if work is performed here for more than 183 days.
Income Tax Deduction Procedure
If the posted person is liable to pay income tax in Germany, the question arises of how the taxation will take place. In the income tax deduction procedure, according to § 38 EStG, income tax is levied on income from employment by deduction from the salary.
The employer withholds the income tax from the employee’s gross income and must ensure that it is paid to the responsible tax office in due time. Therefore, the employer must submit the income tax registration to the tax office first, which is usually done by electronic transmission. The procedure can cause some difficulties, especially for foreign companies. Good consulting may be advisable.
The income tax deduction procedure only takes place if the employer can be considered a domestic employer according to § 38 EStG. To fulfil this requirement, the employer must have a domicile, habitual abode, management, registered office, a permanent establishment within the meaning of § 12 of the German Fiscal Code or a permanent representative in Germany.
If the company in question is not considered a domestic employer, the employee must declare their salary themselves in the annual income tax assessment.
Practice Group: German Employment Law
German Employment Law
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Compulsory Social Insurance in Germany: Legal Advice
In principle, all employees working in Germany are subject to the provisions of German social security law and have to pay the corresponding contributions (§ 3 No. 1 of the Fourth Book of the Social Security Code, SGB IV). This requirement also applies if the employer has no registered or branch office in Germany. This principle is called the principle of territoriality, whereby only the place of employment is decisive. However, there are exceptions.
An exception to the principle of territoriality is regulated in § 5 SGB IV with the consequence that the social security obligation in Germany does not arise. The first condition is that the employee is posted to Germany for a certain period limited in advance. Thus, after employment in Germany, a return should take place.
A time limit can be fixed by contract or result from the nature of the work. In addition, a continuation of the employment relationship existing abroad is required. This requirement means that the employee must continue to be integrated into the foreign company and receive a salary from it.
If the requirements of § 5 SGB IV are met, the social security system of the state from which the posting is made applies. This also applies if the foreign company has a branch office in Germany. Otherwise, the provisions of the SGB IV on compulsory insurance and entitlement to insurance are applicable.