Allocation of the right of taxation
Employees are subject to unlimited tax liability in their country of residence and are therefore also taxed on their remuneration in that country. If the professional activity is not carried out in the country of residence, the double tax treaties regulate in which country the taxation is to take place.
Many employees live along the German borders who regularly commute from their foreign residence to their place of work in Germany or, in the opposite case, perform their work abroad. In the double tax treaties with Austria, France and Switzerland, a so-called cross-border commuter regulation is explicitly included. Contrary to the principle that remuneration is taxable to the extent where the professional activity is carried out, the right of taxation in its entirety is assigned to the country of residence, provided the employee qualifies as a cross-border commuter. To this end, the employee must live close to the border, which is regulated in the respective agreement, and return to his place of residence on each working day.
In the case of other double tax treaties which do not contain any rules on cross-border commuters, the classic criteria for the allocation of the right of taxation are applied.
Effects of working from home?
In times of the Corona crisis, companies have in many instances ordered that work, as far as factually possible, should no longer be carried out at the companies’ premises but from home for reasons of health protection. This also affects cross-border commuters, who would otherwise regularly commute across the border to their workplace. In this case, working from home is often also economically more sensible because otherwise, as a result of the border controls temporarily reintroduced within the EU, an enormously time-consuming border crossing on the way to work would have to be accepted.
This would mean that the conditions for the application of the cross-border commuter regulation provided for in the double tax treaties would no longer be met. Moreover, if working from home were to be carried out over a longer period of time, the 183-day rule provided for in a large number of double tax treaties might no longer apply, which would lead to the risk of a salary split and correspondingly to a proportional taxation in the country of work and the country of residence.
In order to avoid a change in the previous tax treatment of cross-border commuting as a result of temporary work from home, bilateral agreements have been made with both Austria (letter of 16/04/2020 by the German tax authorities) and Switzerland (letter of 12/06/2020 by the German tax authorities). The employee can make use of this by notifying the employer and the responsible tax office in the country of residence. A memorandum of understanding for the double taxation agreement with France already contains a provision according to which working days spent in the home office have no effect on the right of taxation. This was again dealt with in detail in a consultation agreement (letter of 25/05/2020 by the German tax authorities). In the double tax treaty with Switzerland it has already been agreed that it is harmless if there is no border crossing for up to 60 working days.
In addition, Germany and the Netherlands have already agreed that, days worked from home as a result of the Corona pandemic are considered as days worked in the country of employment (as announced by letter of the German tax authorities of 08/04/2020). This regulation applies from 11/03/2020 until the possible unilateral termination of the agreement. However, it can only be applied uniformly in both contracting states. In addition, suitable records must be kept, such as a certificate from the employer on days worked from home due to the corona crisis. A similar arrangement has also been reached between Germany and Luxembourg (as announced by letter of the German tax authorities of 06/04/2020) and between Germany and Belgium (as announced by letter of the German tax authorities of 07/05/2020). This means that the state in which the work is carried out should continue to have the full right of taxation, provided that the 183-day rule is fulfilled with due regard to the fiction.
However, it is also conceivable that employees use their second or holiday home abroad for remote working or are simply stranded abroad. Thanks to technology they should be able to continue working from there. It is currently still unclear how to deal with these taxpayers, who are not classic cross-border commuters in the fiscal sense, but who now work from abroad nevertheless. In the case of a temporary nature, this should have no effect. However, if the professional activity from abroad consolidates, we recommend clarification in the respective state in which the activity is carried out. In addition, a regularly used home office quickly leads to a permanent establishment of the employer abroad. Therefore, we recommend to check the impacts together with the employer.
Social security status when working from home?
Social security cover for an employee who lives in one state and works in another or several other states is generally provided in one state only. Within the EU and Switzerland, there are uniform requirements according to which the social insurance obligation exists in the country of employment if more than 75% of the professional activity is carried out there. If at least 25% of the work is performed in the country of residence, social insurance coverage is provided there. For activities in several EU states and respectively Switzerland, which are not the country of residence, the social security obligation exists in the country of residence, even if no significant part of the activity is performed there.
Temporarily working from home activity triggered by the Corona pandemic should, in principle, not change the existing social security status. The German National Association of Statutory Health Insurance points this out in a circular dated 17/03/2020. The professional activity takes place within the framework of the employer's right of direction and is therefore not detrimental to the existing social security status under social security law.
The announcements focus on the temporary nature of working from home and recommend to negate impacts on tax and social security. However, this should not be relied upon unreservedly, as a temporary activity can also become a regular activity in the future. Taxpayers and their employers should take a close look and examine the respective individual situation in more detail early on.
In addition, employers should, according to their statutory duty of care, inform affected employees about the possible tax and social security consequences of working from home and clarify the handling in each individual case with them.