Intragroup international assignment of employees – Who has to withhold the payroll taxes?
Economic employer as the employer for payroll tax purposes?
Normally, the payment of taxable remuneration is predicated on a civil law relationship between the employer and employee. Under payroll tax regulations, the employer is generally the one to whom employees owe their performance, under whose leadership they work or whose instructions they have to follow. This interpretation is consistent with the definition of an employee as set out under German civil law.
Companies deviate from this when they apply the provision under Section 38(1) sentence 2 of the Income Tax Act (Einkommensteuergesetz, EStG) in the case of the assignment of an employee. Under this provision, the relationship between employer and employee is replaced by a situation where another company financially bears the wages or salary for the work performed by the employee. Consequently, vis à vis the seconded employee’s employer, the domestic (German) hosting company can become the economic employer within the meaning of the above-mentioned provision. However, this does not require the employee to receive their remuneration directly from the hosting company – the contractual employer can continue to pay this. The hosting company will merely have to financially bear the wages or salary for the work performed by the employee.
Whether or not the domestic (German) company, as the hosting company, will indeed financially bear the wages or salary has to be assessed on the basis of the agreements that have been concluded. What always matters here is the arrangement in the specific case. For the assessment it will always also be imperative to consult the seconded employees’ employment agreements with the contractual employer (the assigning company). The agreements will include, among things, information about the level of the remuneration. It is only once this amount is known that it will be possible to determine if and to what extent the remuneration can be replaced.
Please note: It would not be possible to identify the extent to which remuneration is being replaced from the mere payment of monthly lump sums by one company to another. That is why it would be necessary to compare these amounts with the contractually agreed wages or salary.
It is especially important to bear in mind that the apportionment of payments between affiliated companies – and, in particular, if an employee works alternately not just for one company but also for the other without being employed at either – has to stand up to an arm’s length comparison. In the case that the wages or salary have not actually been taken over by the hosting company then, as an alternative, the situation will be reviewed to determine if unrelated third parties would have agreed to pay compensation. The company could potentially become the economic employer even if it does not actually take over the payment of the wages or salary.
However, a company will not become the economic employer solely by taking over the actual payment of the wages or salary. In fact, the seconded employee has to be regarded – in accordance with general principles – as an employee of the hosting company. Therefore, what matters is
- whether or not deploying the employee at the hosting company is in its interests,
- as well as whether or not the employee is integrated into the hosting company’s work processes and is subject to instructions from it.
If all these requirements are met – i.e. the hosting company financially bears the wages or salary, integrates the employee into its work processes and makes the employee subject to the company’s instructions – then the economic employer will become the employer for payroll tax purposes. According to Section 38(3) EStG this would give rise to the obligation to withhold payroll tax and, according to Section 41a EStG, to the obligation to register the employee and then transfer the payroll tax. These consequences would also arise if, in accordance with arm’s length principles, the company was obliged to take over the payment of the wages or salary. Consequently, a foreign employee would be subject to limited tax liability on their income from employment in accordance with Section 49(1) no. 4(c) EStG.
A seconded managing director – Not an exception
When assessing the work of a managing director of a GmbH [private limited company], a distinction has to be made between the managing director’s executive position and their underlying employment relationship. The circumstances of the individual case are what always matter and not solely the executive position.
When considering an individual case, the crucial factor is whether or not the managing director has been integrated, as an employee, into the work processes of the hosting company and subject to instructions from it. Normally, it should however be assumed that a managing director would be deployed in the interests of the hosting company. Therefore, the above-mentioned general principles would apply when assessing whether or not the managing director should be allocated to an economic employer.