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Working abroad
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Working abroad: Who would expect that the type of activity that the foreign employee carries out in Germany, or the powers of attorney granted to them or the duration of projects in which they are employed, will result in tax obligations for the German host company arise. We are talking about an unwanted tax permanent establishment within the meaning of Article 5 of the OECD Model Tax Convention or the bilateral agreements to avoid double taxation (DTA). At the top of the list when working abroad are:

  • Unwanted representative permanent establishment
  • Unintentional construction and assembly facility
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Permanent establishment example

A German company orders a press from Italy; it is custom-made. The supplier plans the machine, then builds and installs it in Germany. It takes more than 12 months from the start of planning to acceptance. This project qualifies as a permanent establishment with the result that the supplier has to pay tax on the project results in Germany.

It therefore counts as working abroad. In other DTAs, much shorter periods than the aforementioned 12 months are also agreed. Every employee of the Italian supplier will now be subject to tax on the number of days worked in Germany, provided that they work within the scope of their employer's business premises. Even if it's just for one day. However, the German company does not have to fulfill any employer obligations and therefore does not have to calculate and pay wage tax. The tax must be declared by the employee himself.

Income tax for persons with limited tax liability

The regular wage tax deduction for work abroad requires that a domestic employer or a foreign employer of workers pays wages to an employee. Temporary workers who are hired from a foreign agency are really “hot”.

Cases of employees being posted from abroad to the country are also covered by the wage tax deduction. All other cases of employees with limited tax liability are not subject to the deduction, but are taxed by way of tax assessment/declaration.

No ELStAM data is provided for employees subject to limited income tax when working abroad. In order for the employer to be able to deduct wage tax, the business tax office issues a special certificate about the tax class and any allowances for children that may need to be taken into account when deducting the solidarity surcharge, as well as any allowances or add-on amounts.

As long as a certificate is not available, tax class I must be settled. If an employer position is assumed (even fictitious), the employer must also fulfill the recording obligations in accordance with Section 41 EStG.

The disadvantages for limited taxpayers

Those with limited tax liability may be in a worse position than those with unlimited tax liability. This is because no joint assessment can be made with a spouse or registered partner.

These people can also only deduct business expenses to a limited extent, and they cannot claim other allowances to the same extent. If they are citizens of the EU or citizens of EEA states, they can still apply for joint assessment under certain conditions and can then claim some expenses for tax purposes. 

Anyone who, regardless of their origin, earns at least 90% of their income in Germany or whose foreign income does not exceed the basic allowance can, upon application, be treated as if they were subject to unlimited tax liability.

Jürgen Bächle
Jurgen Bachle

has been working as an independent tax consultant and expert in international tax law since 1989 and has been a member of the board of the German Association of Tax Consultants Baden-Württemberg, DSTVBW, for over 20 years.

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