In the last article we defined the concepts behind the new forms of working and discussed the relevant aspects of employment law and data protection law. In this article we now provide a closer examination of the consequences with respect to tax and social security law.
Tax law-related requirements and risks
Payroll tax deductions
The right to tax salaries and wages is generally accorded to the country where the work is carried out (= country where the work is performed). According to this principle, in the case of remote work/a workation this would be the foreign place of work.
Deviations from this principle can arise as a result of double taxation agreements (DTAs). If an employee is deployed abroad for a short time only or temporarily then, according to many German DTAs, the right to tax remains with the country of residence if
- the employee who is resident in Germany does not stay or work in the foreign country where the work is performed for a period that exceeds 183 days during the respective tax year, or during a 12-month period and
- the remuneration is paid by, or on behalf of, an employer who is not based in the country where the work is performed and
- the remuneration is not attributable to a permanent establishment or a fixed place of business that the employer has in the country where the work is performed.
The respective DBA will determine if the basis for the calculation of the 183-day period will be the calendar year, a tax year that is different or a 12-month period and whether it will be based on the number of days of the stay or of working days.
Consequently, in regard to the payment of payroll tax, the first step will be to clarify whether the employee wants to work from a foreign country for their German employer only temporarily, or if they will be moving abroad permanently and giving up their domicile and permanent residence in Germany. In the first case, the 183-day rule would be applicable and – provided that the other requirements have been fulfilled – the German employer would be able to pay the payroll tax in Germany. This is because, in Germany, the domestic employer is obliged to pay the payroll tax while the employee has restricted tax liability on account of work carried out or realised in Germany.
By contrast, if the employee gives up their domicile and permanent residence in Germany then the country where the work is performed will have the right to tax and the German employer will potentially have to pay the payroll tax in the country where the work is performed or oblige the employee to pay this themselves if the respective national law permits this.
Permanent establishment risk
When an employee works abroad there is a risk that the German company will thus create a permanent establishment in the country where the work is performed. This could mean that the profit from the workation activities attributable to the company would be subject to taxation in the country where the work is performed and, moreover, obligations could arise in respect of registration, tax declaration, keeping accounts and other records and of documentation.
Recommendation: The risk of creating a permanent establishment should be assessed in each specific case by tax consultants from the country where the work is performed. In this connection, the consultants in our international PKF network would be pleased to assist you.
Social security law
The relevant social security regulations
Employees are generally subject to the social security regulations of the country where their work is performed. This is also true in the case of remote working from abroad on an ongoing basis. There are the following exceptions to this principle:
- The employee is posted abroad by the employer and the posting does not last longer than 24 months.
- The employee works in several foreign countries.
Posting occurs when a worker who is employed in Germany goes to another country when instructed to do so by their employer in order to perform work there for the said employer. It is crucial that a connection to German law exists both before as well as after the assignment abroad. This means that, prior to being posted abroad, the employee’s habitual abode had been Germany and that the prospect of subsequent continued employment following the assignment abroad had existed. Furthermore, the employee must not have been recruited for the purpose of being posted abroad and/or may not be a replacement for any employee who was posted before them.
Please note: Whether or not a workation/remote work constitutes a posting is the subject of dispute and the supreme court has not yet clarified this. Although, if it is possible to demonstrate that the work is carried out from abroad not just because the employee wishes to do so, but that it is also in the interests of the employer then it may be assumed that it is a posting.
Working in several countries
The German social security system would likewise continue to be applicable if the employee retained a domicile in Germany and still spent at least 25% of their working time in Germany. Then, for the remaining 75% of their working time, they could work abroad remotely for their German employer. What would matter is the expected situation in the following 12 calendar months.
New multilateral framework agreement
A multilateral framework agreement came into force on 1.7.2023. Under certain circumstances, workers can spend up to 49.99% of their total working time teleworking across borders, nevertheless, the social security legislation of the Member State where the employer is based will apply. ‘Cross-border teleworking’ refers to activities that can be performed independently of location, i.e. either at the employer’s premises as well as anywhere else in the world using information technology. Customer and trade fair visits are therefore not included.
Please note: The framework agreement may only be applied if it has been signed by both the country where the employed person is resident as well as the country where the employer is headquartered. Germany has signed the agreement.
If German social security regulations are still applicable despite deployment abroad then a so-called A1 certificate has to be applied for in order to provide proof that the employee is subject to the German social security system. The German Liaison Office for Health Insurance Abroad (Deutsche Verbindungsstelle Krankenversicherung – Ausland, DVKA) can provide help with respect to A1 certificates.
However, if the employee is subject to the social security system of the country where the work is performed and frequently stays in Germany (for example, at their employer’s headquarters) the appropriate certificate should be applied for in the country where the work is performed.
Recommendation: It would be advisable, already upfront, to make clear arrangements under the contract of employment. Therefore, the working time and occupational health and safety arrangements, the choice of applicable law and also the requirements under the German Act on Notification of Conditions Governing an Employment Relationship between an employee and employer should be set out in writing. There is also a need for a detailed consideration of the review of which national tax and social security regulations have to be applied.