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Employees (payroll tax)
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The good old wage tax card was replaced by the electronic wage tax deduction features called ELSTAM for short. Each employee was given an identification number instead of a payroll tax card. He informs his employer of this, as well as the date of birth and information about whether there is a main or secondary employment relationship.

The employer registers the employee in the ELSTAM database and, through an electronic data retrieval, finds out the tax class, the number of child tax allowances, the wage tax exemption or additional amount and the church tax deduction. This information is stored in a database at the Federal Central Tax Office and can only be accessed by the current employer.

Employees without a residence or regular place of residence in Germany are only subject to limited tax liability in Germany. You will therefore not automatically be assigned a tax identification number. Upon request, the employer's business premises tax office will issue a certificate for wage tax deduction. In case of doubt, this is provisional until the employee submits their ID number upon their own request. is allocated. 

An employee living abroad or who has recently arrived must provide their ID number within three months. apply for. It remains to be seen whether a newly arrived foreigner can easily cope with the application process. 

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Present electronic control card

The Federal Central Tax Office website offers support in German, English and, with a waiting time of around 10 minutes for the download, also in sign language. Anyone who doesn't understand this or simply forgets the application could become a problem for their employer.

If the electronic tax card is not presented, the employer is allowed to calculate tax according to the expected tax class for three months. He would then have to calculate the tax according to tax class VI. If he forgets to ask after three months, the employee's wages will continue to be paid unchanged, but de jure there may be a higher tax liability / tax reduction, for which the employer is responsible.

At EUR 5.000 gross, the tax difference including SolZ, but without church tax between income tax brackets I and VI is already EUR 5.800 pa. The liability for this could be reduced to zero for a domestic employee who has submitted his tax return. A foreigner would possibly avoid being subject to expulsion by giving notice and moving away. If the issue drags on for several years and possibly affects several employees, then the problem increases.

However, if the employee is to be exempt from tax in Germany due to a DTA, he or she must provide an exemption certificate and a residence certificate based on the official model. For employees based in Switzerland and classified as cross-border commuters based on Art. 15a DBA, the employer based in Germany withholds 4,5% taxes, which are offset against the employee's tax liability in Switzerland.

Wage tax liability without an employment contract and without a domestic place of residence?

It is therefore not necessary to have a contractual relationship between the parties involved, although employer obligations still arise from a purely tax perspective when employees from abroad are deployed in Germany. As long as the “employee” has a place of residence or habitual residence in Germany, he or she is subject to unlimited tax liability anyway. 

On the other hand, anyone who has no place to live in Germany but receives employment income here will be subject to limited tax liability on this part of their income in Germany. The tax law includes income from employment in the tax liability if the work is carried out or exploited domestically. The place where the work is carried out takes precedence over the place of utilization. If the work is carried out domestically but exploited abroad, then there is no foreign, but domestic income. 

Remuneration paid by a third party is to be included in tax liability if it is granted for the purpose of employment and can therefore be considered as the fruit of the employee's service to the employer. The main use case is compensation for employee inventions. Although the remuneration does not reward the work done by the employee, it does compensate for the employer's right to claim the invention.

 

Tax liability example

An engineer from Taiwan is sent by his local employer to a German automobile manufacturer to introduce the new braking system he invented as part of the development of a successor model. Although not his employer in Taiwan, the engineer regularly receives employee invention compensation from his parent company in Japan. The company in Taiwan writes an invoice to the German company for the deployment of the engineer.

Solution:
The engineer does not have a domestic employer and does not live here either. But he does his job here. He is therefore subject to limited tax liability here with his pro rata income from Taiwan and the inventor's remuneration from Japan. Since the German company economically bears the wages, it is declared the engineer's employer in terms of tax law and has to fulfill the corresponding employer obligations and must therefore calculate and pay tax and social security from the income components, although it may not even know the income.

Income tax for persons with limited tax liability

The regular wage tax deduction requires that a domestic employer or a foreign employer of workers pay 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. 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.

Limited taxpayers - unlimited 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.

Tax liability of board members, managing directors, authorized signatories

Another important sub-case of limited employee taxation is the remuneration of board members, managing directors and authorized representatives of foreign companies. Their pro rata salary is subject to tax in Germany if and to the extent that they work in Germany. Because a managing director or board member regularly carries out his work where he actually resides. This also applies to work on a business trip. 

In some DTAs, the right to tax in these cases belongs to the country in which the company has its registered office, despite exercise abroad. The basic tax obligation in Germany still remains, although Germany is not allowed to levy the tax. This must be checked in each individual case based on the DBA.

Fallback clause / DBA

If Germany has to waive any pro rata taxation due to a DTA, the tax authorities will require proof that the corresponding income was also taxed abroad, Section 50d Paragraphs 8 and 9 EStG. If proof is not provided, then Germany will tax despite the DTA. This long-controversial handling has now been approved by the ECJ.

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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