In its circular of 8 October 2024, Germany's Ministry of Finance (Bundesministerium der Finanzen – BMF) addresses the calculation of the wage tax burden in the case of salary split structures. Specifically, it discusses the situation where an employee receives both taxable and non-taxable wage payments in Germany.
Working days abroad
With the BMF circular of 8 October 2024, the tax authorities postponed the obligation to calculate wage tax using the daily tax table by a further year, now effective from 1 January 2025. If the employment relationship existed for the entire month and the employee received wages not subject to wage tax deduction in addition to wage payments subject to tax in Germany in that month, the amendment German Wage Tax Guidelines (LStR) 2023 now requires wage tax to be calculated using the daily tax table instead of the monthly tax table. This refers to situations in which an employee carries out only part of his or her work in Germany. In this case, the obligation to withhold wage tax applies only to the wage payments attributable to working days in Germany. The employee may be subject to unlimited or limited income tax liability in Germany.
Launch not until 1 January 2025
Due to practical issues, the BMF has pushed back its launch of the daily tax table to 1 January 2025. This is after the original date of 1 January 2023 had already been postponed to 1 January 2024. The problem is that the German Wage Tax Guidelines does not state how the days relevant for the daily wage tax calculation ('tax days') should be determined. This has caused considerable legal uncertainty, resulted in different calculation methods, and pushed trade associations to seek clarification from the BMF.
The BMF's simplification rule
The BMF circular sets out a simplification rule stating that a fixed number of 20 tax days per month can be assumed for an employee working full-time. If the 30 calendar days are set in relation to 20 tax days, the factor is 1.5.
For an employee who has a gross monthly salary of EUR 10,000 and in a calendar month spends a total of 12 days abroad and 8 days in Germany, EUR 6,000 (12/20 of EUR 10,000) is therefore tax-free in Germany and the remaining EUR 4,000 (8/20 of EUR 10,000) is taxable in Germany. For the daily wage taxation, 12 tax days are assumed (8 × 1.5 = 12 tax days). The daily rate for the application of the daily tax table is therefore EUR 333.33 (= EUR 4,000/12).
Alternatively, the tax authorities allow the tax days to be determined on the basis of the employee's actual working and non-working days in Germany. In this case, the tax days are calculated by adding the working days in Germany to the non-working days in Germany, proof of which must be furnished. The different calculation methods do not produce the same result. As a rule, however, the BMF's simplification rule is more favourable.
Significant increase in wage tax liability
In practice, the application of the daily tax table considerably increases the wage tax liability. This is particularly relevant for employees subject to limited tax liability. In this case, the wage tax deduction in Germany has a withholding effect. For employees subject to unlimited tax liability, a compulsory assessment must in any case be carried out due to the foreign progressive income. The additional tax burden for these employees is therefore only temporary.
Carrying out an annual wage tax equalisation would offset the tax increase effect resulting from the daily tax table for persons subject to limited tax liability in Germany. This is due to the calculation of the wage tax liability on an annual basis. However, Sec. 42b(1) sentence 3 no. 6 of the German Income Tax Act (EStG) excludes this if income exempt under a double taxation treaty is earned. In addition, the provision is to be tightened with the Annual Tax Act 2024 to the effect that income from which no domestic wage tax has been withheld generally excludes an annual wage tax equalisation.
In such instances – at least for nationals and residents of an EU or EEA member state (recently also for employees resident in Switzerland) – the option to request a voluntary assessment remains. However, such an assessment involves applying the progression method to the income that is not taxable in Germany and in addition leads to higher advisory costs.
Applying the daily tax table in 2023 and 2024
The clarifications provided in the BMF circular of 8 October 2024 on the practical application of the daily tax table are in principle positive. However, the renewed postponement of the launch raises the question of how to proceed in 2023 and 2024. If wage tax has already been deducted in 2023 on the basis of the daily tax table, it must be examined whether a lower tax burden can be achieved in the assessment procedure. For 2024 – until the wage tax certificates are issued – a correction and refund of previously over-withheld wage tax by the employer is possible.
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.
