The Supreme Tax Court has held that the employee of a foreign parent delegated to act as a GmbH's managing director does not automatically rank as the Employee of the GmbH For "wages tax".

The Supreme Tax Court has held that the employee of a foreign parent company did not become the employee of the German subsidiary, merely because he was seconded to Germany to act as the subsidiary's managing director. As the managing director he was a company law organ of the GmbH, but this did not make him its employee. In this respect tax law had to follow civil law, so the Court. The GmbH was therefore not liable to account for "wages tax", the income tax withheld from an employee's salary.

In the case at issue, the employee concerned continued to draw his salary from the parent. He did not enter into an employment contract with the GmbH and otherwise continued to behave as the employee of the parent put to managing the subsidiary on the parent's behalf and in accordance with its wishes. The only activity of the GmbH was to act as the managing (general) partner in a limited partnership. The duty of management fell on the employee concerned in his capacity as the general partner's managing director and legal representative. The foreign parent charged a management fee to the partnership, but this, in the view of the Court, did not change the legal conclusion, as that charge was for the management of the partnership's own business.

Given that a GmbH & Co. KG with a non-operating GmbH is generally regarded for tax accounting purposes as a single unit, the conclusion seems tenable that this case also applies to the more usual, simpler circumstances of a foreign parent's seconding its employee to managed its operating GmbH, but without changing his employment contract. On the other hand, one would expect the tax office to make every effort to contest the issue, if the consequence for them is an apparent loss of tax revenue.

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