Avoidance Of Liability Proceedings For The Employer's Wage Tax Deduction

Author: Michael Yönden, Stahl | Yönden | Witt - Tax Consultants

The employee is liable for wage tax in accordance with § 38 (2) EStG. The employer is liable for the wage tax, which it must withhold and pay. Insofar as the employer's liability extends, the employer and the employee are jointly and severally liable. The permanent establishment tax office can assert the tax liability against each joint and several debtors at its discretion (see Section 42d EStG).

To avoid incorrect wage tax deductions, employers and employees can request wage tax information from the relevant local tax office. At the request of one of the parties involved, the tax office must provide information on whether and to what extent the regulations on wage tax apply in the individual case (§ 42e EstG). The request for information is always free of charge, issued promptly, exempt from liability and binding for the tax office in the wage tax deduction procedure for the individual case. No specific form is required for the application in accordance with § 42e EstG, but it should be made in writing. The request for information must set out specific legal issues that are relevant to the individual case (see BMF, letter dated 12 December 2017, IV C 5 - S 2388/14/10001, BStBl I 2017, 1656). A holiday with unintended (tax) consequences

Facts of the case:

An international German supplier to the automotive industry has subsidiaries worldwide, including in the USA.

Due to the changes in the automotive industry and the expansion of the U.S. market, the commercial employee (K) travels to the USA several times in the calendar year 2023 on behalf of the German parent company to visit the branches there.

K's work-related stays in the USA range from a few days to several months. Consequently, K also spent time in the USA on weekends when he was not working Accumulated business-related stays in the USA, including weekends, do not exceed 183 days in a calendar year.

His salary is borne economically by the German parent company, as K was working in the USA solely in the interests of the parent company. There was also no permanent establishment of K's parent company in the USA to which K belonged economically.

K spent a three-week holiday in the USA with his family in the summer of 2023. As a result, K exceeded his stay in the USA to over 183 days in the 2023 calendar year. His employer's HR office was not aware of the family holiday.

In 2023, K earned income from employment (Section 19 EStG) in the amount of EUR 250,000. The annual bonus from 2022 in the amount of EUR 50,000 accrued to him in 2023 and is included in the 2023 income tax statement.

The annual premium from 2023, which is expected to be EUR 100,000, will be paid to him at the beginning of 2024 and will be subject to German income tax accordingly. In 2024, K will no longer be travelling to the USA on business, but will instead devote more time to the Asia-Pacific region for his employer.

K worked a total of 230 days for his employer in 2023, of which 130 days were demonstrably spent in the USA.

K consulted a tax consultant (S), who assessed the tax situation. It turned out that the income tax deduction had not been made correctly by his employer. K was very angry about this.

Taxation of employment income:

K has a place of residence in Germany in accordance with § 8 AO and is therefore subject to unlimited tax liability in Germany.

His employer subjected his salary of EUR 250,000 for 2023 to German wage tax and paid it to the tax office. However, according to the facts of the case, K physically carried out part of his work on site in the USA.

He was working in the interests of the German parent company. His salary was borne economically by the parent company and paid to him.

Furthermore, the parent company did not have a permanent establishment in the USA to which K was assigned.

The parent company was not aware that K had been physically in the USA for more than 183 days because the family leave was not noted in the employee's work calendar.

According to Article 15 (1) DTA-USA, the principle of taxation applies where the physical (labour) activity is carried out.

The USA would therefore have the right to tax the labour income. It must also be checked whether the right of taxation does not revert to Germany, Art. 15 (2) DTA-USA. For this, the three requirements must be met cumulatively

a) and c) can be disregarded, as it can be proven that K physically spent more than 183 days in the USA in calendar year 2023.

This was due to his family holiday in the USA. When calculating K's days of stay, it is irrelevant whether they are weekends or holidays. In this respect, the right of taxation in the USA applies to days physically worked in the USA.

The right to tax K's 2023 salary is to be split between the USA and Germany due to the 183 days in the USA being exceeded. The salary should be split between the USA and Germany for taxation purposes.

The right to tax K's 2023 salary is to be split between the USA and Germany due to the 183 days in the USA being exceeded. The salary should be split between the USA and Germany for taxation purposes.

Apportionment of taxation in the USA and Germany:

Irrespective of the submission of the full salary in 2023 with German income tax, K must file a tax return in the USA and declare his pro rata income, i.e. income attributable to the USA, and pay tax in the USA. Since both HR and K did not assume that they were liable to pay tax in the USA, the U.S. income tax return was only submitted in the USA after the filing deadline had clearly expired and the additional payment was imposed accordingly with late payment penalties and interest.

The working days are set in relation to each other as the allocation benchmark. For the calendar year 2023, there were a total of 230 working days. Consequently, 130/230 days of his gross salary are declared and taxed in the USA on a pro rata basis.

However, since K received his annual bonus from 2022 in calendar year 2023 and this is not economically related to the activity in the USA, this bonus must be deducted from the income to be apportioned for the purposes of apportioning the tax base.

K must subject the EUR 113,000 to taxation in the USA and declare it in Germany in his income tax return as tax-free progressive income in accordance with Section 32b (1) no. 3 EStG. In order to obtain tax exemption, he needs proof of taxation of this income in the USA. If he cannot provide this, Germany will tax this income, § 50 (8) EStG.

However, this does not mean that K has completed his tax obligations in the USA. Irrespective of whether he will also be working in the USA in 2024, he must also pay tax on his annual bonus from 2023, which he will receive in 2024, on a pro rata basis in the USA and declare it in Germany as tax-free progression income in accordance with Section 32b (1) no. 3 EStG. The allocation of the 2023 annual bonus is also based on the circumstances of the 2023 calendar year. As a result, approximately EUR 56,500 must be declared in the USA for 2024.The treatment of this income in Germany is analogous to 2023.

Conclusion:

This case shows how important it is for the HR department to obtain information about the employee's days of residence in the country of employment so that an appropriate wage tax deduction can be made. If the employer is not sure whether an income tax deduction should have been made, the employer could apply to the relevant permanent establishment tax office for a notification of income tax deduction in accordance with § 42e EStG. If the correct amount of tax had been withheld, the employee would not have suffered a liquidity disadvantage due to the gap between the income tax to be paid in the US and the income tax refund in Germany, which is not issued until later.

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