Working Remote Tax Implications in Germany

Introduction

The COVID-19 pandemic has provided everyone with an alternate working method: remote working. The same has become a necessity in today’s world, with many corporations permanently shifting to a remote setting and providing employees with an opportunity to work from the comforts of their homes. However, tax issues can arise for remote cross-border commuters with increased remote working and opportunities. The situation related to working remote tax implications in Germany has evolved so much that even the OECD stated they would consider tax implications related to remote work. 

Therefore, this blog analyzes the working remote tax implications in Germany, discussing the potential risks of working overseas for a foreign company from Germany and working remotely from another country for Germany.

How is tax paid when remote working in Germany?

Taxes, fines, and other legalities require employees to be compliant with the rules and regulations applicable at the local level if they have immigrated from another country such as the UK, USA, Netherlands etc. When it comes to remote working, the place of residence is usually the appropriate jurisdiction in which the employee must pay taxes. The same is the case in Germany. If salaries are paid within the ambit of the German payroll, they are subject to taxes, irrespective of whether the employee is remotely working or physically present. Wage taxes, as applicable, are held back by the respective employers, and eventually, the adjustments are made in the final annual income.

However, Germany does have separate provisions for adequate tax deductions for all their German taxpayers. It is possible for up to 20% of tax payments to be deducted in cases contributions have been made to charities or if they deduct a certain amount as childcare expenses, provided that the required thresholds are met. Further, tax may be deducted for up to 30% of the tuition fee for dependent children and may also be deducted in case of alimonies.

It was further seen that Germany had concluded double taxation treaties (DTTs) with multiple countries to help its remote workers from being double taxed at the source and the resident country. The same had been concluded with 6 countries, including Luxembourg, Austria, Belgium, The Netherlands, France, and Switzerland. According to the DTT, the workers were meant to be taxed in the country where the employee worked. This allowed the countries to tax the employees according to their residence and helped avoid further confusion.

German residents working for a foreign company: Working remote tax implications

This section deals with the aspect of German residents who are remotely working for companies located outside of Germany and the tax implications for the foreign company and such remote employees. 

Most employers and companies would usually be familiar with the German employment and taxation laws considering that they originate from the European Union, the model of which has been used by many jurisdictions worldwide. Therefore, most businesses are already familiar with the potential risks of employees working remotely, especially if their residence is in Germany only. However, businesses need first to decide how they shall hire employees remotely. In case the foreign company has not yet been set up in Germany, it is possible for them to either open a local entity and hire employees and put them on the company payroll.

Otherwise, the company can work as an employer on record (EOR), wherein the company hires another company to help hire employees to work for a foreign company that has not been set up in Germany. This allows the company to hire employees without investing further to establish a local entity within Germany and even provides the company with a chance to analyze the working situation prevalent in the country in case the company plans to open a local entity in Germany sometime in the future.

However, Permanent establishment (PE) issues can arise if the foreign company is not set up in Germany. PE refers to the place of fixed business capable of serving a corporate purpose. Therefore, if the foreign entity has not yet been set up in Germany. Still, the employee works from Germany for the company and habitually exercises employer-given authority to conclude contracts for the foreign company from Germany.

It is possible that the employee creates a PE for the company within Germany. In such a case, considering that profits had been attributed in the place where the contract was concluded, which is in Germany, the appropriate corporate tax can be attributed to that company, making it difficult to use the DTT exemption. This would further make the foreign company liable for liabilities capable of arising under Germany comparable to Value Added Tax (VAT).

It is important to note that the said situation arises only when the employee earns the authority to conduct business on behalf of the foreign company within Germany. In case the employee is simply working for the benefit of the company, without having any authority on the contracts concluded by the company, the case of PE would not be applicable.

While this might seem straightforward in theory, it becomes difficult to differentiate between the situations in practical situations. Hence, the outcome often depends on the specific facts and circumstances surrounding the employer. This is why it becomes imperative to consult an accredited tax advisor who can provide the company with an accurate picture of the working remote tax implications in Germany, especially concerning PE. Therefore, you can connect with us at LegaMart to find specific answers to all your tax-related queries and to understand the potential risks for both the employer and the employee. We are always there to help you win your battles and provide clarity.

Remote working has transformed how we work and helped us gain experience overseas from the convenience of our home countries or our choice of country. Now that you are equipped with the knowledge about the environment Germany has to provide to remote workers, you might want to know more about the immigration process for Germany so you can continue your digital nomad lifestyle and move to another country to visit or immigrate.

Foreign residents: Working Remote tax implications in Germany

This section deals with the aspect of remote workers located outside Germany who are working for German companies and the tax implications for the German company and such foreign remote workers. 

Considering the employee is working remotely, there wouldn’t be any specific requirement for a work permit or visa. However, certain things must be considered when an employee plans on working remotely from a foreign jurisdiction for a company located in Germany. Some common considerations include – tax obligations in respective residences, employment agreements between the German company and the employer, and social security.

When it comes to residence, permanent and temporary abroad, the residence makes a difference under German law. In case of permanent residence in a foreign jurisdiction, German labour laws would not be applicable, and the respective residence tax rules would apply to the citizens, considering the DTT between the foreign jurisdiction and Germany.

Working remote tax implications in Germany also take a negative turn if the employer already has a German residence permit. Irrespective of whether it is a regular permit or an EU Blue Card, you cannot stay outside Germany for a very long time. At maximum, you may be allowed to work outside Germany for up to 183 days, after which you might face tax issues and lose entitlements.

It is also essential to consider the limited tax liability applicable to employees earning from Germany. Working remote tax implications in Germany can be tricky when a foreign resident citizen earns from Germany since the employee’s income is subject to limited tax liability. Nevertheless, the same situation might be overcome by the DTT between the foreign jurisdiction and Germany as long as the countries mutually decide to keep it. While DTT might help you overcome this hurdle, however, there might be a possibility that employers will make automatic deductions on your income due to their respective rules. Therefore, taking complete information about these aspects is essential beforehand and thoroughly reading the employment agreement.

Therefore, working remote tax implications in Germany for foreign resident employees are dependent upon the agreements established between the countries and the residence rules applicable to the foreign jurisdiction since German laws come into the picture only when the employee is living in a temporary residence or is an EU Blue Card holder, or if the employment agreement states otherwise.

How do foreign businesses pay remote workers in Germany?

Before foreign businesses hire remote employees in Germany, they must adequately figure out how to pay them. If the business wants to pay the employee themselves, they require the assistance of a local entity to be able to hire employees in Germany. If you do not have your local entity in Germany, it is possible to take the help of an employer of record (EOR) to help you employ workers on behalf of the company within Germany. Considering that Germany is a member of the Eurozone, the laws in Germany require companies to pay their employees in Euros. 

Opening your business’s legal entity in Germany

If your business is considering expanding into Germany and further having a long-term engagement and hiring spree within the country, opening a separate legal entity in Germany is a good solution. However, this requires proper documentation along with an expenditure of substantial costs. This may be done through registration at the German Chamber of Commerce, which provides hiring help to businesses. 

In total, 79 chambers of commerce exist within the country, excluding the chambers abroad. 

Before joining a specific chamber of commerce, you must conduct adequate research to identify the right chamber for your business. Some factors to be considered when deciding on a chamber are the minimum capital of the company, founding shareholders, and liabilities, among others. Therefore, identify the correct category of your business, and follow the registration procedure. 

Tax rates for tax brackets in Germany

Germany uses progressive tax brackets, similar to many other European countries. Tax brackets currently are:

• 0% tax rate – for single taxpayers earning under €9,744 or €19,488 for a married couple.
• 14% – 42% – this is a progressive tax rate for single taxpayers earning between €9,744 and €57,918 and between €19,488 and €115,863 for a married couple.
• 42% – for single taxpayers earning between €57,918 and €274,612 and between €115,863 and €549,224 for a married couple.
• 45% – for single taxpayers earning over € 274,612 or € 549,224 for a married couple. 

Tax deductions for German taxpayers working remotely

German taxpayers (i.e., workers/residents working remotely within the jurisdiction of Germany) have the advantage of using laws that allow them certain deductions in specific circumstances, which may be used to reduce taxable income and generate substantial tax savings. This is especially the case for remote German workers having a German residency and who are expected to pay their work taxes within the jurisdiction of Germany. Therefore, if you want to save some money on your next bill, the following list can be helpful for you:

1. Contributions to Charity. German taxpayers can deduct up to 20% of payments to German charities. You can completely deduct church taxes in Germany. 
2. Childcare costs. If workers in Germany meet specific criteria, they can deduct a portion of childcare expenses. This amount cannot exceed €4,000 per year if the children are younger than 14 years. However, for children with disabilities, parents can deduct the complete amount after the child turns 14 as well. 
3. Education expenses for dependent children. If the child attends a recognized private school in the EEA/EU country, parents can deduct 30% of tuition fees. The limit of deduction is €5,000 per year per child.
4. Alimony. Individual taxpayers can deduct up to €13,805 for alimony. 

Taxation of per diem in Germany

Expenses per diem are mainly relevant for employees travelling for work in Germany. The costs incurred by the employee in relation to travels conducted on behalf of the company are expected to be reimbursed by the company per day in the form of “allowances”. Therefore, the employer is expected to provide the employee with per-day expenses to cover their travel and living expenses for travels related to the company work. However, this does not cover the personal expenditure of the employee. 

Per diem, meal payments are often provided to German employees, especially those travelling for work. According to the current laws, German employees receive €14 per diem for a trip between 8-24 hours. The amount is increased to €28 per trip if the trip exceeds 24 hours. 

If the employee receives meals at the hotel or any conference at no extra cost to the employee, it results in a deduction in the per diem for that specific day. The deduction is 20% for breakfast and 40% for lunch. 

Note that per diem is not applicable for transport, accommodation, or any other costs incurred during client meetings. Rather, these are separately reimbursed by the company. 

Conclusion

It becomes essential to clarify the possible working remote tax implications in Germany. Usually, problems arise when the company involved doesn’t have any physical entity present within the jurisdiction of Germany, due to which problems related to PE can arise, which often get more complicated when case-specific situations are considered. Withholding such payments can push an individual into legal uncertainty, which may become difficult. Therefore, it becomes imperative to become well aware of the local laws present in the place of residence and to study the treaties between the foreign jurisdiction and Germany before deciding to pursue a remote opportunity in Germany or for Germany.

Considering remote working is bound to rise further in the coming time, it becomes imperative to have complete knowledge about the technicalities involved and to be prepared for any situation. While you complete your study, LegaMart is always here to guide you further in your pursuit. 

Uncover the steps and procedures for immigration to different nations, with a focus on Turkey to Norway and US to Portugal, in Legamart’s insightful articles.

Frequently Asked Questions (FAQs)

What parts of salary are taxable in Germany?

The common practice is to pay taxes where you live. The same is the case with Germany as well. If salaries are paid under the German payroll, they are subjected to wage taxes. The employer withholds the wage taxes, and is eventually credited against the final annual income tax charge. Note that if the company does not have any legal entity in Germany, then the tax is withheld by the employer of record. 

What is the minimum wage in Germany?

The minimum hourly wage in Germany is €12 per hour. Working hours have also been limited for German employees under the German Act of Working Time (Arbeitszeitgesetz), which is 8 hours per day and 48 hours per week. Overtime is capped at two hours per day, which cannot exceed six months. This is adequately reimbursed by the employer through paid leaves.