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An increasing number of employees, especially managers, are assuming responsibilities which require that they work regularly in countries other than Germany. The question arises as to the advisability and possibility of exempting the salary attributable to work in foreign countries from German taxation. The answer is that exemption is generally advantageous, and feasible as well if certain conditions are met.

German exemption of salary attributable to foreign working days generally means that such salary is taxable in the country where the work is performed, and the salary attributable to work in Germany is taxed here. Hence, the salary is split for tax purposes between two taxing jurisdictions. This is as a rule advantageous for several reasons. Sometimes, the foreign country may not tax at all. Furthermore, its rates of individual taxation may be lower than Germany's. Advantages also arise because of the graduated structure of most income tax systems. A reduction of taxable income here reduces income taxed at the marginal rate applicable to the taxpayer. In Germany the highest marginal rate with solidarity surcharge but without church tax is currently 56.5 %, beginning at taxable income of DM 120,000 / DM 240,000 for single and joint filers respectively. The rates applied in foreign countries to income earned by non-residents are usually much lower because, in the foreign country, one starts at the bottom of, or at least further down, the progression ladder. A tax split thus typically takes income which would attract high marginal taxation in Germany and subjects it to lower marginal rates in the other country. Spreading income between several countries is in principle even more advantageous for the same reasons.

Now knowing why a tax split may be a good idea, how can it be done?

Let us assume that an individual earning DM 200,000 gross salary resides in Germany and is employed by a German GmbH. His responsibilities involve 20 working days outside Germany in 5 different countries (total 220 work days per year). The individual does not move away from Germany and has his or her family and only permanent home here. Such an individual (current tax rates, without children or other income, assuming standard deductions, solidarity surcharge, and no church tax) will save DM 8,065 in German tax as a result of a salary split. A married individual in the same situation would save DM 5,841. Any tax paid in the foreign countries would reduce these savings.

The bilateral tax treaties which Germany has entered into with practically all major industrial countries, and numerous others besides, generally provide for exemption of salary paid for work actually performed in the other treaty state. Since the interests and the influence of the various countries differ, there are sometimes substantial differences in the wording of the various treaties. The following comments are nevertheless valid for most but not all of Germany's tax treaties. Each case must therefore be reviewed individually to see whether and how tax exemption can be achieved.

For many countries, the requirements for exemption are as follows:

a) The individual must perform work in a treaty country. His physical presence there is necessary, but no minimum number of work days is required.

b) The employee must perform the work for an employer who is resident in the treaty country where the employee physically performs his work. As will become clear, "employer" for this purpose basically means the person who economically bears the salary we are seeking to exempt. There are three ways to meet this requirement.

i) Separate employment contract
A separate employment contract is concluded with a group company located in the respective country. This second employment contract covers the employee's activities in the respective country, and the German salary is reduced by the same amount. The salary for the foreign work is paid by the foreign group company.

ii) Cross-charging the related salary
Here a separate employment agreement is unnecessary. The salary related to the activities of the employee in the respective country is simply invoiced by the German group company to the respective foreign group company. The employee receives his full salary as before exclusively from the German group company. Instead of charging the salary back to a foreign group company, it is also sufficient if the salary can be charged to a branch of the German company in the respective foreign country.

iii) Employment with the German branch of a foreign company
An employee of the German branch (e.g. a representation office or a factory, but not an AG or GmbH) of a foreign corporation is deemed to have an employer who is resident in the country where the home office is located. For example, if an individual is working at the German representation office of a Dutch bank, then the individual is employed by a Dutch company. If the individual performs work in Holland, it is exempt in Germany, even without charge-back to Holland in this case.

It should be pointed out that, under alternatives (i) and (ii) above, there must be a plausible relationship between the work performed in the foreign country and the foreign entity (group company or branch of the German company). A sufficient nexus exists when the services performed by the individual in question are arguably in the interest of the foreign entity and of benefit to it. It may also be advisable under charge-back relationships involving other group companies for the German company to conclude an agreement with the foreign group company with respect to the charge-back. Otherwise, the foreign group company may encounter difficulty in deducting the payment on its tax return.

c) Number of days in the respective treaty country

If requirements (a) and (b) are met, Germany as a rule grants a tax exemption no matter what the length of stay in the other country.

If there is no employer resident in the other country, then the exemption from German taxation only occurs if the employee is physically present in that country for more than 183 days during a certain twelve-month period, usually the calendar year. Non-working days such as weekends or vacation also count in determining the length of physical presence.

If the above requirements are met, the related salary will be exempted from German taxation. However, Germany will take into account the exempted salary in determining the rate of tax which is applied to the remaining taxable German income.

The example chosen involved only 20 days in foreign countries. Longer stays, particularly in a single country, are more complex from a tax point of view and can pose problems with regard to social security as well. This is a complex topic which can only be touched on here. Of great importance is whether Germany has concluded a social security treaty with the country in question.

Inside the European Union, social security liability is covered by EU Regulation 1408/71. This regulation generally results in social security liability in only a single Member State of the Union. It is important to be sure what state this is, as its laws in theory apply to all employment relationships within the Union. For non-EU-countries, it is important to find out whether a totalization agreement exists.

Generally, it is possible to plan a salary split so that social insurance liability exists only in Germany. It is, however, risky to refrain from clarifying the situation in advance.


Very often a salary split can be accomplished for employees with responsibilities outside Germany. Such salary splits can result in substantial overall tax savings for the individual. It should also be noted that splitting an employee's salary is often in the employer's best interest as well. When an employee's foreign activities benefit the foreign group company, but not his or her German employer, a German company which fails to charge the related salary to the foreign subsidiary or affiliate may find itself denied a deduction for such salary on audit.

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This article treats the subjects covered in condensed form. It is intended to provide a general guide to the subject matter and should not be relied on as a basis for business decisions. Specialist advice must be sought with respect to your individual circumstances. We in particular insist that the tax law and other sources on which the article is based be consulted in the original, whether or not such sources are named in the article. Please note as well that later versions of this article or other articles on related topics may have since appeared on this database or elsewhere and should also be searched for and consulted. While our articles are carefully reviewed, we can accept no responsibility in the event of any inaccuracy or omission. Any claims nevertheless raised on the basis of this article are subject to German substantive law and, to the extent permissible thereunder, to the exclusive jurisdiction of the courts in Frankfurt am Main, Germany. This article is the intellectual property of KPMG Deutsche Treuhand-Gesellschaft AG (KPMG Germany). Distribution to third persons is prohibited without our express written consent in advance.