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For many companies, bonus payments are an important instrument for employee retention and motivation. The tax treatment of variable remuneration is particularly complex in the case of cross-border employment relationships in which employees work both in their home country and in another country.
In addition to the national provisions of local tax law, the correct allocation of such payments is governed in particular by bilateral double taxation agreements (DTAs). In practice, however, this often results in qualification conflicts - which could lead to double taxation or double non-taxation.
If an employee now works across borders as part of a posting, the tax allocation of the income must be checked once the residence under treaty law has been determined. Provisions in connection with the allocation of tax on income from employment can be found in Art. 15 OECD-MA.
Thus, "... salaries, wages and similar remuneration received by a resident of a Contracting State in respect of employment may be taxed only in that State, unless the work is performed in the other Contracting State. If the work is performed there, the remuneration received for it may be taxed in the other State."
A definition of "salaries, wages and similar remuneration" cannot be found in the double taxation agreements. Therefore, in application of Art. 3 para. 2 OECD-MA, domestic law must be used to interpret the terms, whereby the scope of the remuneration is to be equated with income from employment within the meaning of § 25 öEStG. The income covered by Art. 15 para. 1 OECD-MA therefore also includes bonus payments and premiums in addition to the current salary.
As can be seen from the wording of the law, Art. 15 para. 1 OECD-MA generally assigns the right to tax non-employment income to the country of residence.
However, income can be taxed in the other state if the work was performed there, as employment is generally deemed to be performed where the person is physically present at the time the activity for which the remuneration is granted is performed. The terms "country of residence" and "country of activity" are therefore relevant.
The country of residence is the country in which the employee is resident for tax purposes. The latter is defined either as the country in which the employee is resident for tax purposes. In the case of residences in several countries, the country of residence is the country in which the employee has the closest personal and economic ties.
According to the principle of causality, only those parts of the remuneration that are attributable to an activity physically carried out there may be taxed in the country of activity. It is therefore only important that the remuneration is paid for a foreign activity.
The time and place of payment of the remuneration are irrelevant.
The source state on the other hand is the state from which income is received - usually the state in which the employer is based.
The right to tax income that is attributable to an activity in a third country (i.e. neither the source country nor the country of residence) belongs to the country of residence.
In practice, the number of relevant working days is used as a principle for apportioning the remuneration received. In order to take account of the causality principle, the following procedure must therefore be followed when determining the income to be apportioned:
- Firstly, the reference components that are clearly directly attributable to a state are attributable to the respective state. Causally attributable to the activity means that the payments would not have been incurred if this activity had not taken place. Likewise, subsequent payments for a previous activity must therefore be allocated according to the original income earned.
- Remuneration that cannot be directly allocated must then be divided according to the number of working days, whereby this also applies to the associated income-related expenses.
The following example is intended to illustrate the above:
Mrs Mayer, an employee of an Austrian company, is temporarily posted to work in Germany for 3 years. She does not give up her Austrian residence. She establishes a residence in Germany to carry out her work in Germany and regularly returns to her family in Austria at weekends. In year 1, Mrs Mayer works a total of 220 working days, 185 of which are spent in Germany, 15 in Austria and 20 in France. In year 2, she is paid a bonus for year 1. In year 2, she works a total of 225 working days, of which 190 are worked in Germany, 10 in Austria and 25 in France. Solution:
Mrs Mayer is resident in Austria for tax purposes, although she has two residences. This is because the centre of vital interests continues to be in Austria (her family continues to live in Austria). Austria is the country of residence and the source country. The working days in Germany are subject to taxation in Germany and those in Austria are subject to Austrian taxation. However, the 20 working days performed in France are subject to taxation in Austria, as Austria is the country of residence.
If Mrs Mayer is paid a bonus for year 1 in year 2, the allocation ratio would have to be based on the number of working days in year 1, as the bonus is paid causally for year 1. In this case, the causality principle overrides the accrual principle. The allocation of the remuneration can therefore already be made in payroll accounting or, if necessary, as part of the tax return.
Conclusion
The taxation of bonus payments for cross-border activities requires precise documentation and exact knowledge of the tax regulations. Double taxation agreements and the causality principle help to ensure a fair distribution of the tax burden. It is essential for employees and companies to check the respective tax obligations at an early stage in order to avoid additional claims or double taxation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
