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Foreign parent corporations often detach employees to Germany for periods of up to five years to work for their German subsidiaries. During their stay in Germany, these expatriates usually remain under contract to the parent corporation and often draw their salary directly from it. As a rule, however, the parent charges these salaries back to its German subsidiary.

In such situations, the German tax authorities take the position that the German subsidiary is required under sec. 38 EStG to withhold German wage tax even with respect to salaries paid from abroad. While sec. 38 EStG only imposes a duty to withhold on "domestic employers", the tax authorities argue that this term can be interpreted economically. Under this view it makes no difference whether a contractual employment relationship exists between an expatriate and the subsidiary as long as the subsidiary bears the economic burden of the expatriate's salary. The tax authorities point in this respect to a decision by the Federal Tax Court on Germany's tax treaty with Spain in which the concept of "employer" was interpreted economically for purposes of the article on income from dependent personal services (see in this connection our article on salary splits in this issue).

The issue was recently litigated before the Duesseldorf Tax Court, which rendered a little-noticed decision rejecting the position of the tax authorities and holding that the employer within the meaning of sec. 38 EStG is as a rule the employer under the employment contract (19 Jan. 1995 - EFG 1995, 530). The Tax Court distinguished the decision of the Federal Tax Court regarding the economic interpretation of "employer" for tax treaty purposes because it considered the grounds of this decision to be peculiar to the tax treaty context. The decision was not appealed and is now final.

The case involved a general manager of a German GmbH who spent an average of five days a month in Germany managing the GmbH and was otherwise active at the headquarters of the corporate group in Switzerland. It is not clear from the grounds of the decision whether the Court would have ruled the same way in the case of someone better integrated into the work structure of the GmbH and possessing less factual and legal independence than the general manager in the case decided.

Even so, we welcome the contribution made by the Tax Court to clarifying an issue which often gives rise to disputes with the tax authorities.

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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.