The Federal Ministry of Finance (BMF) has carried out a long overdue revision of at least some critical issues with the publication of a revised letter on the tax treatment of wages under double taxation agreements (DTAs).
Residency
The new administrative principles include a more comprehensive definition of residency within the meaning of the model convention. The residency of a taxpayer is decisive for the allocation of taxation rights, e.g. of wages and capital assets, as well as for the question of which state has to avoid double taxation. The BMF has supplemented the assessment of the centre of vital interests with a number of criteria for the personal circumstances of a person's private life and economic relationships.
Economic employer
If an employee works in the country of their economic employer, they are subject to taxation there from the very first day. How long the taxpayer stays in this contracting state is then irrelevant, as the so-called 183-day rule is cancelled out by the economic employer. The decisive factor in determining the economic employer is, among other things, the business interest, the determination of which the BMF has reorganised and included a variety of criteria. Remuneration is now easier to allocate to the sending or receiving employer. The added examples of the taxpayer's obligation to provide evidence and documentation are also helpful.
Stock options
A ruling by the Federal Fiscal Court in 2022 clarified that the taxpayer's place of residence at the time the stock options are exercised is decisive for the allocation of taxation rights in cross-border situations. In its letter, the BMF follows the view of the Federal Fiscal Court. It can be assumed that the tax authorities will treat other special payments for multi-year employment (anniversary payments, severance payments, bonuses, etc.) accordingly. This approach will inevitably lead to differing opinions between the German tax authorities and other countries, which may result in double taxation or non-taxation. It remains to be seen whether the tax authorities will adhere to their strict approach or whether an agreement can be reached between the German tax authorities and other countries.
Further topics
The letter also contains a number of new examples, definitions and additions on other topics such as working from home or tax equalisation / tax protection.
Application to all open cases
With the publication of the new BMF letter, older announcements have been cancelled. Experience in the coming years will show to what extent the new regulations will lead to material changes. A clearer approach to the tax treatment of wages under the DTA remains to be seen. Differing interpretations of the treatment of wages with the tax authorities are to be expected. In case of doubt, "it depends."
We would be happy to advise you on any questions you may have on the subject of employee secondment.