To be attractive especially for sought-after specialists, employers increasingly offer the possibility to work abroad temporarily or even permanently, i.e. to work literally “borderless”.
This applies not only to German but also to foreign employers. In our consulting practice, we have received an increasing number of inquiries on this topic, especially since the start of the Corona pandemic.
In addition to the employer’s motives, it often plays a role that employees want to live closer to family in Germany, for example, but at the same time keep their jobs in another country. There are a number of reasons why the (physical) workplace is not necessarily in the country of residence.
From a tax perspective, “borderless” working leads to challenges, which are summarized below by way of example. As each case has to be considered individually, the following summary should also not be seen as recommendations for action, but rather as an incentive to look further into the topic and seek tax advice.
Spanish employee M (single) lives in Germany all year round and wants to work for company U in Spain. M works exclusively virtually for U. U has not yet established a legal entity or a permanent establishment in Germany.
From a tax point of view, the following main challenges arise:
- U must register as an employer and perform monthly payrolls for M in Germany. Not to mention paying payroll taxes in Germany. This involves additional effort and costs for U, since payroll accounting is often performed by external providers (tax consultants) due to the complexity involved.
- More importantly, however, the tax registration of U in Germany may lead to a permanent establishment taxation risk of U. The question of whether a permanent establishment exists is decided by national law in conjunction with treaty law (double taxation agreements, DTAs). Since the national regulations and the respective applicable DTAs are often very different, an examination of the individual case is necessary. For example, it often depends on the employee’s role in the company, i.e. whether the employee is, for example, a sales employee with a focus on Germany or an internal role in the company.
In addition to tax aspects, it must also be checked whether there is a social security obligation in Germany, since M spends more than 25% of his time in Germany.
Often foreign companies that do not want to establish a legal entity or a permanent establishment in Germany consider offering their “employees” a contract as freelancers. In this case, not only the obligation of tax registration is omitted for the company, but also the risk of permanent establishment taxation.
For the freelancer concerned, this results in the obligation to register for tax purposes and to pay German taxes (income taxes, sales taxes, possibly trade taxes). This is usually associated with a cost, as the help of a tax consultant is often required due to the complexity of German tax law.
For the company, there is a high risk that the freelancer’s activity will be classified as so-called false self-employment, because in most cases the freelancer only serves one client. If the freelancer is found to be a false self-employed person, the company would be obliged to pay social security contributions, even for the past.
German tax (and social security) law currently offers insufficient options to make “cross-border” living and working attractive for companies and employees.
Due to the increasing internationalization and virtualization of the working world, we believe there is an urgent need for action, especially on the following aspects:
- Creation of uniform national and treaty definitions of permanent establishments
- Limited cross-border work should not automatically lead to permanent establishment issues
- Registration as an employer, the payment of wage tax, and the submission of an income tax return in Germany should only be necessary for foreign companies with employees in Germany after a certain number of days. Of course, this also applies in reverse to German companies sending employees abroad
Source: NWB, EY
Photo: Hunters Race, Unsplash
Disclaimer: We assume no liability for the accuracy and completeness of the information. The information provided here does not constitute a recommendation for action.
