Tax law for employees posted to Germany

Your guide to the tax treatment of foreign employees in Germany

About this Page

When unlimited tax liability is triggered by a residence in Germany.
The significance of the territoriality principle in limited tax liability.
How double taxation agreements and the 183-day rule protect against multiple tax burdens.
Why the issue of permanent establishments is crucial for foreign employers.

Table of Contents

1. Unlimited tax liability upon posting to Germany

2. Limited tax liability when posted to Germany

3. Double Taxation Agreements and Secondment

4. Permanent establishment and payroll tax in the case of secondment

5. FAQ Taxes when seconded to Germany

6. Conclusion: Taxes when seconded to Germany

1. Unlimited tax liability upon posting to Germany

If a foreign employee establishes a residence in Germany pursuant to Section 8 of the German Fiscal Code (AO) or a habitual abode pursuant to Section 9 of the German Fiscal Code (AO) as part of their secondment, this generally triggers unlimited tax liability pursuant to Section 1 Paragraph 1 Sentence 1 of the German Income Tax Act (EStG) . In this case, the individual is subject to German taxation on their worldwide income, which means that, in principle, all income earned both domestically and abroad is subject to German taxation, unless overriding international agreements stipulate otherwise.

In our consultations, we regularly point out that it is legally possible to have multiple residences simultaneously, which significantly increases the complexity of taxation. Even if income from dependent employment is exempt from German tax under a tax treaty, the so-called progression clause according to Section 32b Paragraph 1 No. 3 of the German Income Tax Act (EStG) often applies, which can increase the tax rate on the remaining taxable income.

2. Limited tax liability when posted to Germany

If an employee establishes neither a residence nor their habitual abode in Germany, limited tax liability under Section 1 Paragraph 4 of the German Income Tax Act (EStG) may apply. In this case, only specific domestic income , which is exhaustively listed in Section 49 of the EStG, is taxed. For employees , the territoriality principle under tax law is decisive, which states that tax liability arises when the work is performed or utilized within Germany (Section 49 Paragraph 1 No. 4a EStG).

Particular caution is advised regarding executives, as Section 49 Paragraph 1 No. 4c of the German Income Tax Act (EStG) stipulates that remuneration for managing directors or board members can also be subject to limited tax liability if the company's place of management is located in Germany. In these situations, we always examine for our clients whether an existing double taxation agreement exceptionally assigns the right to tax to the foreign country in order to avoid unnecessary tax burdens in Germany.

3. Double Taxation Agreements and Secondment

To prevent income from being taxed in two countries simultaneously, double taxation agreements (DTAs) come into play, which in Germany are mostly based on the OECD Model Tax Convention . While the principle of the place of work generally applies, according to which the country where the work is physically performed has the right to tax, there are significant exceptions to this for short-term assignments.

The best-known exception is the 183-day rule according to Article 15(2) of the OECD Model Tax Convention, according to which the right to tax remains with the state of residence if the stay in the state of employment does not exceed this period. However, a mandatory requirement is that the remuneration is paid by an employer who is not resident in the state of employment and that the costs are not borne by a permanent establishment there.

4. Permanent establishment and payroll tax in the case of secondment

A frequently underestimated risk in employee secondments is the creation of a permanent establishment for the foreign company, even if it does not maintain a physical branch in Germany. The activity of a single employee who is engaged in entrepreneurial work for the company in Germany for a certain period of time can be sufficient to establish a permanent establishment, to which the corresponding profits must then be attributed for taxation.

For the purposes of payroll tax liability, the permanent establishment is treated as a domestic employer and is obligated to withhold and remit the payroll tax for the employee working there ( § 38 para. 1 no. 1 EStG ). We support companies in correctly implementing these employer obligations , particularly when the receiving company in Germany bears the economic burden of the remuneration or would have had to bear it according to the arm's length principle .

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5. FAQ Taxes when seconded to Germany

What happens if both states claim the right to tax?

In such cases, the tie-breaker rules of the respective double taxation agreement determine the unambiguous tax residence.

Are services such as language courses or moving expenses taxable?

Such "fringe benefits" are generally taxable in Germany, unless they are granted predominantly in the employer's own business interest.

Does the employer always have to pay income tax in Germany?

Yes, if he is considered a domestic employer, which is also the case if there is a German branch or if economic costs are borne by a German company.

6. Conclusion: Taxes when seconded to Germany

The tax implications of an employee's secondment are highly complex due to the overlap between national law and international agreements. While unlimited tax liability is usually tied to residence, the principle of the place of work often grants the German tax authorities access to income even for shorter assignments. For companies, the issue of permanent establishments is a key liability factor that must be examined early on. Sound tax advice is therefore essential to avoid double taxation and to ensure that all employer obligations are fulfilled in a legally compliant manner.