Background

A number of our international clients work in Germany for a Germany-based company but their families live in another EU country. Question is how this is being income taxed in Germany and the other EY country, as well as in which country social security obligations have to be made. We look for answers.

Example
The situation

A typical case is the following:

  • Husband works in Dusseldorf, Germany, for a German employer.
  • Wife and children stay in Amsterdam, The Netherlands. Husband travels back from Dusseldorf to Amsterdam, being the habitual residence (center of life), mostly on weekends.
  • Wife is employed in the Netherlands.
questions

Selected questions are:

  • Where am I taxed? In Germany, the Netherlands or both countries?
  • What about payroll tax deductions? What tax class makes sense to me?
  • In which country do I have to file income tax returns? In Germany, the Netherlands or both countries?
  • What about my social security obligations?
answers
Where am I taxed? In Germany, the Netherlands or both countries?

Well, it depends.

The commencement of a domestic activity by a foreign cross-border commuter gives rise to his limited German income tax liability with respect to his domestic income, subject to the intervention of a double tax treaty (DTT). There is no unlimited German income tax liability as long as:

  • no (further) residence is established in Germany, and
  • the habitual residence is not relocated to Germany.

In the given example, a further residence is established in Germany; hence, the income of the husband would be subject to limited income taxation in Germany. 

Upon application by the tax payer (here: husband), is possible to switch to treatment as an unlimited income taxpayer even without a residence or habitual abode in Germany if:

  • at least 90% of the income in the respective calendar year is subject to German taxation, or
  • the income not subject to German taxation does not exceed the basic tax-free amount pursuant, income not subject to German income tax that is not taxed abroad is not taken into account when determining this income if comparable income is tax-exempt in Germany.
Why should one apply for unlimited income taxation in Germany?
Because the income tax rates are generally lower in Germany than in the Netherlands. The change to full income tax liability does not expand the factual scope of income tax liability beyond domestic income (e.g. the wife’s income is still taxed in the Netherlands), but it does provide certain benefits we do not further explain here, including (a) participation in family benefit equalization, and for EU citizens (b) the use of the splitting tax rate (lower than taxation for singles), (c) expanded real splitting in terms of the facts. In contrary to that, social security contributions are typically higher in Germany compared to the Netherlands. Therefore, there is no perfect solution that fits all.
What about payroll tax deductions? What tax class makes sense to me?

Insofar as Germany has the right of taxation, the foreign cross-border employed by a Germany-based company is subject to wage tax deduction. Benefit of unlimited income taxation in Germany for EU citizens is that be granted tax class III (leading to higher pay-as-you go amounts) and an allowance for spousal support can be entered  to the tax card for the divorced or permanently separated spouse who is not subject to unlimited income tax liability.

In which country do I have to file income tax returns? In Germany, the Netherlands or both countries?

In the given case, given that the husband is only subject to limited income taxation, the payroll deduction covers his tax obligations in Germany; hence, he is not required to file a tax return in Germany unless he has other income in Germany that is subject to taxes (e.g. rental income). The husband and his wife have to file income tax declarations in the Netherlands.

If the husband applied for unlimited taxation in Germany, he would need to file income tax declarations in Germany and the Netherlands.

What about my social security obligations? 

The working time in the country of residence determines which legal regulation is applied for social security obligations. If the working time in the country of residence is more than 25%, the social security obligation of the country of residence applies. During Corona-times, e.g. if the husband works more than 25% at his home office in the Netherlands, it not unlikely that he his obliged to contribute to the Dutch social security scheme. Uncertain cases need to be confirmed with the employer upfront and the employer should agree with the social security authorities of Germany and the Netherlands to avoid any issues.

How can we help you?

Tax law can be complicated, especially in cross-border cases. To avoid double taxation or compliance issues, tax advice is needed. Our team is there to help answering those questions.

Sources: DTT, NWB, Status: 13 March 2021

Photo: Guillaume Périgois, Unsplash

Disclaimer: We assume no liability for the accuracy and completeness of the information. The information provided here does not constitute recommendations for action.

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