Due to the current situation, many employees now work from home for most or even all of their time. This also applies to cross-border commuters, i.e. people who live in one and work in another country.
The right to tax the incomes of cross-border commuters results from the double taxation agreement (DTA) concluded between the country of residence and the country in which the work is carried out, provided such a DTA exists.
The DTAs between Germany and its immediate neighbours contain different provisions on this issue. While some DTAs contain explicit provisions for cross-border commuters (such as the DTA between Germany and Switzerland), other DTAs require the general rules for taxation of labour income to be consulted, which are in principle based on article 15 of the OECD Model Tax Convention, but which may also contain individual provisions which may deviate in detail from this article.
When applying the provisions of a DTA, the number of days of presence in the respective countries often has a significant role to play. Longer hours working from home can therefore mean that the right of taxation passes from one state to another when applying the existing regulations. This would have an impact on the employee’s tax situation that would not have occurred had the employee worked as before the current situation.
The Federal Ministry of Finance (BMF) is determined to avoid unwanted effects of this kind. According to a communication by the Ministry of 3 April 2020, temporary consultation agreements are to be concluded with the neighbouring countries. The purpose of these special bilateral arrangements is to ensure that employees continue to be treated for tax purposes as if they had carried out their activities as usual at their place of work, despite the fact that they are working from home.
According to the Finance Ministry, this should, however, only apply to working days on which the employee worked from home “solely due to measures taken to combat the Covid-19 pandemic”. If the employee worked from home independent of these measures, this so-called ‘imputed fact’ will not be applicable; in this context, the Ministry is particularly considering cases where an employee’s employment contract provides for working from home anyway.
Finally, the Ministry of Finance also points out that in its view, the change in the right of taxation if a double taxation agreement exists does not generally constitute material unfairness because there is no risk of double taxation in such a case. Therefore, a pragmatic regulation would be appropriate for a limited period of time in order to avoid confusing people in the current situation by creating additional tax implications.
Comment and recommendation
It is generally to be welcomed that, by agreement between the country of residence and the country of work, an attempt should be made to avoid unwanted tax effects for cross-border commuters as a result of the corona pandemic and to maintain the accustomed tax status quo in the event of unforeseen working from home. However, since only those days working from home are to be considered to be relevant which are caused “solely due to measures taken to combat the Covid-19 pandemic”, new differentiation difficulties are likely to arise which will hopefully be solved in a practice-oriented manner.
Up to now, the measures have only been announced. If no corresponding agreements are concluded, the reference by the Federal Ministry of Finance to the avoidance of double taxation under the existing DTAs will probably mean that fairness measures cannot be expected, even if the change in taxation law would result in higher taxes. This is due to the regulatory mechanism of the DTA, which is intended to avoid double taxation but is not designed to ensure that the lower tax level is applied.
At present, we recommend that cross-border commuters document the reasons for working from home as promptly and accurately as possible in order to make it easier to prove at a later point in time that work was carried out “solely due to measures taken to combat the Covid-19 pandemic”.
Update (06/04/2020, 4:30 p.m.):
The first mutual agreement was announced this afternoon. This is a mutual agreement between Germany and Luxembourg. It applies to working days in the period from 11 March 2020 to 30 April 2020. The mutual agreement will be extended by subsequent terms of one calendar month each unless it is terminated by one of the two countries at least one week before the beginning of the following calendar month.
On the basis of the mutual agreement, working days for which wages are received and on which employees work from home only because of the measures to combat the Covid‑19 pandemic can be considered as working days spent in the contracting state in which the employees would have worked had the measures to combat the Covid‑19 pandemic not been implemented.
Suitable records must be kept if this imputed fact is to be applied. According to the language of the mutual agreement, an employer’s certificate is the only form of suitable record. This certificate must state the working days during which the employee worked from home office due to the Covid‑19 pandemic. The mutual agreement also contains a fall-back clause to ensure that the wage will be definitely taxed in one of the two countries.
Finally, it is made clear that the two countries agree that the ‘short-time benefits’ paid in Germany and the ‘amounts due to short-time working (chômage partiel)’ paid in Luxembourg are to qualify as remuneration from the statutory social security system of the respective country within the meaning of article 17 (2) of the double taxation agreement.
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