Employment Tax
Germany | Revised BMF letter on the tax treatment of wages under DTAs
Summary
On 21 December 2023, the German Federal Ministry of Finance (BMF) published a new letter on the tax treatment of wages under double taxation agreements (DTA) (BMF letter dated 12 December 2023, IV B 2 – S 1300/21/ 10024 :005), which replaces the BMF letters dated 3 May 2018 and 22 April 2020 and is to be applied in all open cases.
The changes in the new BMF circular focus on the determination of the employee’s residency and the verification of the economic employer.
The Detail
Residency according to the DTA
When determining residency, the tax authorities do not deviate from the test steps outlined in the previous circular. However, on the one hand they specify them using various examples, and on the other hand they reflect the previous opinion of individual authorities, taking case law into account. Accordingly, despite being accompanied by the family in the host country, residence under the DTA may remain in Germany if the domestic accommodation is retained and the assignment is limited to less than five years. Only in the case of an indefinite assignment or an assignment of five years or more is it assumed that the more significant personal relationships are transferred to the host country. In the case of an assignment initially limited to less than five years, there will likely be a rebuttable presumption in practice in future that the residence under the DTA will remain in Germany if the domestic accommodation is retained. However, if the assignment is extended, and exceeds a total of five years, a change of residence will take place from the time of the extension of the contract.
Although at first glance, this appears to clarify the residency test, this carries substantial potential for double taxation if the host country assesses residency under the DTA differently. A survey within the Vialto Partners network has shown that many countries do not share the view of the German tax authorities and assume a change of residence to the host country due to the accompanying family even for assignments of significantly less than five years. A few countries may follow the German approach, but this entails additional bureaucratic burdens, as it may require, for example, the application for a German certificate of residence.
In addition, the BMF also comments on “chain assignments” from Germany to successively different countries. If the accommodation in the home country is kept, Germany is considered to be the country of residence, as no significant personal or economic relationships can arise due to the temporary period of residence in the respective different host countries.
Economic employer
Regarding the economic employer assessment, recent rulings have also been taken into account and parts of the previously only mentioned BMF letter of 9 November 2001, relating to the examination of income allocation between internationally affiliated companies in cases of employee secondment have been integrated.
The new BMF circular deals in detail with the economic employer test. This is relevant insofar as the existence of an economic employer in the host country regularly transfers the right of taxation of the respective salary to the host country under the DTAs (irrespective of the number of days spent in the host country).
As before, the host company becomes the employer within the meaning of the DTA (economic employer) if the employee is integrated into the host company and the host company bears the salary economically as a result of its own operational interest in the assignment or should have borne it according to the arm’s length principle. However, in addition to statements on the assessment of the business interest and the remuneration borne or to be borne, the employer is now also obliged to issue a certificate to the employee documenting the cost allocation in accordance with the arm’s length principle. The remuneration components to be treated as wages and the other wage costs must be shown separately. The certificate, which thus documents for the employee whether and to what extent the costs were charged to the host company in accordance with the arm’s length principle, has an indicative effect.
Based on the new BMF circular it can generally be assumed that the activity is carried out exclusively in the interests of the host company if it is certified by the employer that all wage, ancillary wage and wage administration costs associated with the assignment are charged to the host company. If these costs remain wholly or partially with the home company, the assignment is deemed to be (also) carried out in the interests of the home company.
In addition to the increased administrative burden, the interactions between the allocation of the right to tax salary and the transfer pricing principles applied will increasingly come into focus in the future.
Exemplary further changes
The new BMF circular also clarifies that the determination of residency under DTAs must always be made at the time the salary is received. This takes up the decision of the German Federal Tax Court of 21 December 2022, which concerned the allocation of stock options in cases of change of residence. In this respect, the residence in the vesting period is no longer relevant for the allocation of wages in the case of subsequent remuneration, in contrast to the previous approach in practice. Only taxation rights during the vesting period based on the so-called allocation articles of the DTA are considered in combination with the residency according to the DTA at the time of receipt. This means that for subsequent payments that these may be subject to tax in the current country of residence on a pro rata basis, although the former salary was not subject to taxation in this country during the vesting period.
On this point too, a survey within the Vialto Partners network has shown that many countries do not share the German view and that this can lead to double taxation. It would have been desirable for the BMF to explain this approach, which has far-reaching consequences, in more detail with examples instead of just mentioning it in general terms. It is questionable whether this was deliberately left open and whether further clarifications can be expected in the future.
The BMF circular also contains new explanations in the areas of remuneration for partnerships, special tax regimes and consequences of subject-to-tax clauses, sign-on bonuses, employee shareholdings and dividend equivalents, severance payments and garden leave, home office activities, tax equalization/protection mechanisms and company pension schemes in cross border cases, among others.
How we can help
We will be happy to provide you with a detailed presentation of the amended points at our virtual Coffee Breaks on 30 January 2024, 10.00-11.00 am (GMT+1) and on 1 February 2024, 10.00- 11.00 a.m. (GMT+1). The webinar will be held in German. Registration is available here.
Contact us
For a deeper discussion on the above, please reach out to your Vialto Partners point of contact, or alternatively:
Mathias Schmitt
Partner
Damaris Besenreuther
Senior Manager
Further information on Vialto Partners can be found on our website: www.vialtopartners.com
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Vialto Partners (“Vialto”) refers to wholly owned subsidiaries of CD&R Galaxy UK OpCo Limited as well as the other members of the Vialto Partners global network. The information contained in this document is for general guidance on matters of interest only. Vialto is not responsible for any errors or omissions, or for the results obtained from the use of this information. All information is provided “as is”, with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information, and without warranty of any kind, express or implied, including, but not limited to warranties of performance, merchantability and fitness for a particular purpose. In no event will Vialto, its related entities, or the agents or employees thereof be liable to you or anyone else for any decision made or action taken in reliance on the information in this document or for any consequential, special or similar damages, even if advised of the possibility of such damages.
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Further information on Vialto Partners can be found here: www.vialtopartners.com
Vialto Partners (“Vialto”) refers to wholly owned subsidiaries of CD&R Galaxy UK OpCo Limited as well as the other members of the Vialto Partners global network. The information contained in this document is for general guidance on matters of interest only. Vialto is not responsible for any errors or omissions, or for the results obtained from the use of this information. All information is provided “as is”, with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information, and without warranty of any kind, express or implied, including, but not limited to warranties of performance, merchantability and fitness for a particular purpose. In no event will Vialto, its related entities, or the agents or employees thereof be liable to you or anyone else for any decision made or action taken in reliance on the information in this document or for any consequential, special or similar damages, even if advised of the possibility of such damages.
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