New Regulation concerning the tax treatment of employment income according to Double Tax Treaties

Practical effects of the taxation process in home and host country relating to Germany

Economic Employer

• The economic employer principle is now and for the first time explicit described in a circulation of the German fiscal administration.
• The main deviations in comparison to the regulations by civil law are the integration of an employee in the affiliated company as well as if the affiliated company will bear the personal salary costs of the assignee due to own operational interests or if they have to bear the personal salary costs due to the arm’s length principle.
• In this context, there will be on the one hand a connection to the transfer pricing points of view for the evaluation and classification of employment income and on the other a connection to the economic employer principle based on German wage tax law.

Calculation/determination of days of stay/working days

• The new regulation includes that in case of a DTT conversion into a 12-months period instead of the calendar/fiscal year, the 12-months calculation is also applicable if the beginning will extend into the application period of the old DTT.
• In addition, the change of treaty residency during the aforementioned periods needs to be considered. This means that days in which the taxpayer performs working days in the residency country will not be considered within the calculation of the 183-days-ruling.

Treatment of managing directors

• The initial situation is that an individual person conducts a formal employment contract with a group company abroad, but will be supplied to a domestic company in Germany due to a managing contract.
• In the case that the employee is registered as a managing director in the German commercial register, the German host company will be treated as the economic employer as far as the director is integrated in the German company. This shall not apply for the case that the managing director acts only to fulfill an obligation from a service contract and the salary is only a price component of these services.

The new regulations have a practical relevance for global companies and respectively their employees in view of the taxation of several compensations (e.g. employment income, etc.) and might occur in a double or non-double taxation in the home and host country.

Please contact Mazars` Global Mobility team to understand the impacts of these new regulations for your company and employees!