Introduction

The COVID-19 pandemic has provided everyone with an alternate way of working: 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 remote work taxes has evolved so much that even the OECD stated they would consider tax implications related to remote work. 

Therefore, this blog analyses 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?

Taxes, fines, and other legalities require employees to be compliant with the rules and regulations applicable at the local level. 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 had further been seen that Germany had concluded double taxation treaties (DTTs) with multiple countries to help its remote workers from being double taxed, both 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 was carrying out the work. This allowed the countries to tax the employees according to their residence and helped avoid further confusion.

Tax risks of working remotely from overseas

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 remote tax implications in Germany, 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 analyse 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 in case the foreign company has not been set up in Germany. PE refers to the place of fixed business capable of serving a corporate purpose. Therefore, in case 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 a possibility 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, however, 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 a true 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.

Tax risks of working remotely in Germany from another country

Considering that the employee is working remotely, there wouldn’t be any specific requirement for a work permit or visa. However, there are certain things necessary to consider 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 labor laws would not be applicable, and the respective residence tax rules would be applicable 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 important 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, it becomes important to take full information about these aspects beforehand and to thoroughly read 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.

Conclusion

It becomes important 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 are capable of arising, 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.