Employers and income tax: Why the new employer’s certificate now requires a standardised process

Part 1

International operations have long been part of everyday business – not only in global corporations, but also in medium-sized enterprises with one or a few foreign subsidiaries. As soon as employees start working across national borders, the question arises as to which country has the right to tax their wages. This is not just a matter of the well-known 183-day rule. Under Article 15(2)(b) of the OECD Model Tax Convention, the right to tax may transfer to another country from the very first day of assignment abroad if the so-called ‘economic employer’ is based there. We are seeing this increasingly in modern matrix structures within corporate groups, but also in smaller international groups of companies.

When is an employer considered to be a commercial employer?

A foreign company is regarded as the economic employer if the employee works in the business interests of that entity, is professionally integrated into it (first condition) and the company bears the cost of the employee’s wages or, under the arm’s length principle, would have been required to bear that cost (second condition). These two criteria determine the tax classification of the work performed – and thus the correct treatment for the purposes of payroll tax deduction in Germany.

Pay-as-you-earn tax deduction: What happens during the year?

As soon as and to the extent that the conditions for an economic employer abroad are met, the corresponding portion of the salary must be exempted in Germany from the first day. In practice, it is advisable to issue a certificate of exemption as part of the payroll tax deduction procedure (mandatory only in certain double taxation agreement cases). In operational terms, the Federal Ministry of Finance (BMF) circular of 8 October 2024 stipulates:

• First, record the salary directly attributable (domestic/foreign days, etc.)
• Estimate the remaining salary during the year (month/year)
• At the end of the year, verify the estimate and carry out the final allocation between taxable and tax-exempt amounts (true-up, with corrections where necessary)

The new employer’s certificate as a test of consistency

At the turn of the year, two worlds collide: the HR department must reflect the final DBA allocation in the payroll tax deduction; Finance/Transfer Pricing must determine the final cost allocation (0/100/x per cent) – including payroll administration costs, bonuses/share-based remuneration and confirmation that the figures are final (no chargebacks). It is precisely this information that is required by the standardised “Employer’s Certificate on Cost Allocation for Submission to the Tax Office of Residence”, as set out in the Federal Ministry of Finance (BMF) circular of 19 December 2025, in addition to the pure payroll data. Only if the allocation (payroll department) and cost ratio (financial accounting/transaction processing) are consistent will the presumptive effect and the simplification in the tax assessment apply. If consistency is lacking, this provides a prime point of focus during an external payroll tax audit or even a corporate tax audit.

Why companies need a standardised process

The employer’s certificate highlights that the secondment of staff is a cross-functional issue, particularly within a group of companies:

• The payroll department calculates figures during the year using estimates, followed by an annual true-up.
• Financial accounting determines the actual cost ratio (including administrative costs).
• Transfer pricing assesses arm’s-length compliance and ensures correct cost allocation.
• The employer’s certificate requires the final cost ratio, which must comply with arm’s-length principles – in other words, more information than is available in the payroll records.

Only when these departments work together in an integrated manner will payroll tax deductions and the certificate be consistent.

Preview of Part 2
In the next part, we will show why the employer’s certificate requires information that only Financial Accounting and Transfer Pricing can provide – and how companies can structure their cost base so that the certificate stands up to scrutiny.