COVID-19 and the measures to prevent its spreads have resulted in a situation where most countries have closed their borders. Consequently, cross-border movement hardly occurs and foreign employees are forced to work at home in their home country and not in the country where their employers are resident. Such circumstances may have impact on the tax position of the employees.
We would like to illustrate the possible impact based on a few examples deriving from our Global Mobility Services practice. We emphasize that eventually the consequences depend on the specific situation and therefore need to be determined on a case-by-case basis.
Tax consequences for home office workers in Germany
- Wages for working days in a foreign country, in which the employer is resident, are usually taxed in that country.
- Wages for working days in their home country, Germany, are usually taxed in Germany.
- Particularly workers who commute daily from their place of residence to work in another country are affected by the current exit restrictions imposed by Covid-19.
- Performing more working days in the home office than usual leads to an increase of the taxable base in Germany. Depending on the tax rate in the respective countries this can lead to a significant higher or lower overall tax burden for cross border commuters in times of Covid-19.
Special cross border regulations in the Double Tax Treaties with Austria, France and Switzerland
- Different from above there are special rules for cross border commuters in specific Double Tax Treaties (i. e. Austria, France and Switzerland): Here the state of residence has the full taxation rights, if certain conditions are meet.
- Due to the increased activity in the home office, the so-called "non-return days" could be exceeded and special cross border regulation cannot be applied anymore. Thus in case of a German domiciled person, Germany could lose their full taxation rights and taxation rights can be partly shifted to another state (see further explanations below).
- In addition to the possible change in the tax situation for employees, the employer may have to withhold tax from the salary to be paid in the other state and pay it to the responsible authority.
The important criteria for these special cross border commuter rules are:
a) Local area
According to the Double Tax Treaties with Austria and France, the activity must be carried out within a certain border zone, which is for:
Austria: 30 km on this side (residence) and 30 km across the border (workplace)
France: principally 20 km on this side (residence) and 20 km across the border (workplace). The places concerned are listed in the Franco-German consultation agreement regulation
b) Non-return days
The cross-border commuter must in principle return to his place of residence every day. It is only harmless for:
Austria and France: if there is no return to the place of residence on more than 45 days or the employee works for the employer outside the border zone
Switzerland: if there is no return to residence on more than 60 days
Germany and Austria agreed that home office working days will be counted as non-return days.
Example 1: DTT Austria
Employee G has his residence in Germany 10 km from the Austrian border. He works for an Austrian employer. His place of work in Austria is 5 km from the border. G returns daily to his place of residence in Germany.
Result: G exercises his activity in Austria, he stays in Austria for more than 183 days and he exercises his activity for an employer resident in Austria. However, G is a cross-border commuter, as his residence and place of work are both within 30 km of the border. The wage is therefore taxed in Germany, the country of residence.
Example 2: DTT Austria without a Covid-19 special regulation
Employee G (as in example 1) no longer returns daily to his residence in Germany due to Covid-19, but works for 10 weeks (5 days per week) in his home office.
Result: By crossing the 45-day limit, G loses his status as a cross-border commuter for the entire year. The salary is thus taxed in the country of employment, which means that Germany only retains the right of taxation for the 50 days in the home office. Austria is permitted to tax the Austrian working days.
Special regulation in the Double Tax Treaty with Luxembourg
- The Double Tax Treaty with Luxembourg does not have a special cross border commuter regulation.
- However in the Memorandum of Consultation both countries agreed that, if the employee works in the state of residence or in a third country for less than 20 working days per calendar year and if this wage is actually taxed in Luxembourg, Germany tax exempts the entire remuneration.
- Due to working in the home office in Germany for more than 19 days, it could be that this exemption rule cannot be applied anymore and Germany (partly) taxes the remuneration.
What special rules apply due to Covid-19?
- As shown above an increased number of home office days can quickly lead to a change in the allocation of taxation rights.
- Changes in the allocation of taxation rights concerned may have negative impacts on the tax situation of the employees.
- The Federal Ministry of Finance is therefore seeking to agree special bilateral arrangements in order to prevent the effect that is associated with an unintentional change in the right of taxation and already agreed on special bilateral arrangements:
Austria, Luxembourg, the Netherlands, Belgium, France, Switzerland: deemed place of work
- Working days made in the home office due to the Covid-19 pandemic are not counted as non-return days or days worked in the residence country, Germany, but counted as working days in the country in which the work would have been performed without the Covid-19 measures.
- Thus the deemed place of work concept is not valid for working days, which would have been performed in the residence country without the Covid-19 measures (e.g. contractual agreed home office working days).
- Employees are obliged to keep appropriate records.
- The agreement applies to working days in the period from March 11, 2020 to April 30, 2020.
- After April 30, 2020, it is automatically extended from the end of one calendar month to the end of the next calendar month.
- As soon as the measures declared due to the Covid-19 pandemic are reduced, this special arrangement will also be revoked.
Example 3: DTT Austria with a Covid-19 special regulation
Employee G (as in example 2) still does not return daily to his residence in Germany due to Covid-19, but works for 10 weeks (5 days per week) in his home office.
Result: Exceeding the 45-day limit has no effect on the status as a cross-border commuter due to the special regulations. Germany has the full right of taxation on the salary of employee G.
Update December 10, 2020
On December 8, 2020, a consultation agreement was also concluded between Germany and Poland. Thus, the concept of the deemed place of work also applies to the Double Taxation Agreement Germany - Poland. The agreement can be applied for working days between March 11, 2020 and December 31, 2020. Unless the agreement is terminated one week before the beginning of the following calendar month, the application will be extended by one month.
Update 11th May 2020
According to the consultation agreement between Belgium and Germany dated 6th May 2020, deemed place of work concept also applies to cross-border commuters between Germany and Belgium. This deemed place of work concept is valid from 11th March 2020 until 31st May 2020 and is extended by one month if the competent authorities agree in writing at least one week before the beginning of the following month.
Update 26th May 2020
The period of application of the consultation agreement between Belgium and Germany was extended by written agreement dated 20th May 2020 until 30th June 2020.
A consultation agreement between France and Germany was also concluded on 13th May 2020 (Letter ruling German Ministry of Finance dated 25.5.2020). As already expected, it was clarified that the additional home office days do not change the distribution of taxation rights for German-French cross-border commuters for which the special cross border agreement in the Double Tax Treaty Germany and France applies However it was agreed that working days on which the employee does not work but receives salary due to government health regulations or recommendations are not counted for the purposes of the 45-day rule. For other cross-border commuters, who do not meet the requirements for the special cross-border commuter regulation in the Double Tax Treaty Germany and France, the deemed place of work concept applies as for the previous cross border worker consultation agreement between Germany and certain neighbouring states. The deemed place of work concept applies from 11th March 2020 until 31st May 2020 and is extended by one month, unless the agreement is terminated by the competent authorities.
Update 19th June 2020
As expected, a consultation agreement between Switzerland and Germany was also concluded on 11th June.2020 (Letter ruling German Ministry of Finance 12th June 2020). For cross-border commuters, for which the special cross border agreement as per Double Tax Treaty Germany – Switzerland applies, and for other cross-border commuters, the deemed place of work concept as described above also applies.
Special regulations for the cross-border commuters, which fall under the special Double Tax Treaty cross border commuter clause: a return to residence is assumed in case of a deemed working day. The days on which the cross-border commuter stays overnight in his or her country of employment due to the pandemic also count as return days in the sense of the cross-border commuter regulation, provided that the employer bears the costs of overnight stays. Caution is required, however, as the 60 working day limit must be reduced proportionally and the employer must confirm this in writing. We will be happy to assist you in fulfilling these documentation requirements.
The agreement applies from 11th March 2020 to 30th June 2020. Unless the agreement is terminated one week before the beginning of the following calendar month, the agreement duration is extended by one month.
Currently the fiction of place of exercise is only applicable in the cases of Austria, Luxembourg, the Netherlands, Belgium, France and Switzerland. For all other tax treaties the general tax treaty rules as outlined above are applicable.
Feature of fictitious business premises
Home office activities may also give rise to business premises risks, especially if the employees concerned are allowed to negotiate and sign contracts on behalf of the company and do so in the home office. They could then, as dependent representatives of the company for which they work, create a tax liability for the company in their state of residence.
Grant Thornton is your partner of choice
Would you like more detailed information on the issues involved or do you have any questions e. g. on the documentation obligations? We would be pleased to help you assess the tax implications and their impact on the employee and your business.