The 2024 Annual Tax Act Draft: Extending limited tax liability on employment income

28.05.2024 | FGS Blog

The 2024 Annual Tax Draft provides for an extension of the income from employment that is subject to limited income tax liability. The new section 49(1) no. 4 letter f of the Income Tax Act (GITA) is intended to cover remuneration received by an employee as part of 'gardening leave' (connected to the termination of the employment relationship). The new tax situation is backed by Sec. 50d (15) GITA. The regulation sets out how taxing rights under tax treaty law for gardening-leave payments would take place. The provision should ensure the correct application of double taxation treaties (in the sense of a double taxation treaty [DTT] application regulation). The statutory changes must be observed, for the first time, for payments during gardening leave after 31 December 2024.

Extending limited tax liability payments during gardening leave

Taxing income from employment was previously permitted only if the (employment) activity was in principle carried out or exploited in Germany. If an employee was resident abroad when the employment relationship was terminated during gardening leave, their remuneration was not previously subject to limited income tax liability under German law. This did not relate to remuneration earned by the employee for an activity carried out or exploited in Germany.

Section 49 (1) no. 4 letter f GITA seeks to close the taxation gap. The planned new regulation will therefore expand the income from employment subject to limited tax liability. If an employee would have carried out their work in Germany had they not been placed on gardening leave, the remuneration earned during this period has limited income tax liability in Germany. The tax is then levied either by means of wage tax deduction by the domestic employer or by means of the employee's income tax assessment.

DTT application regulation for remuneration paid during gardening leave

Should a DTT between Germany and the employee's country of residence exist, the introduction of para. 15 of Sec. 50d GITA should regulate how income earned during the period of gardening leave is taxed. 

Remuneration earned during the period of gardening leave is deemed to be ‘notional’ granted for an activity in the country in which the activity would have been performed if the gardening leave agreement had not been concluded. The German legislature is justifying amending the law. It states that it is in line with the opinion in para. 2.6 of the OECD Commentary on Art. 15.

If an employee would have carried out their work in Germany had they not been placed on gardening leave, the remuneration earned in this period is also deemed to be remuneration for work performed in Germany. According to the provisions of the DTTs relating to income from employment, Germany has the right to tax this. If the employee would not have worked exclusively in Germany during the period of gardening leave, there must be an appropriate allocation of the payments paid (possibly in the form of an estimate based on the periods of employment in the past).

Some DTTs have special rules for the allocation of the right to tax remuneration earned during gardening leave. These special regulations are to be applied with priority. The DTTs concluded by Germany with Switzerland and Luxembourg, for example, provide for corresponding agreements. The former country of employment is then also assigned the right of taxation.


The planned extension of limited taxable income from employment is surprising. In the Federal Ministry of Finance circular of 23 December 2023, the tax authorities had still stated in marginal no. 362 (in the case of an irrevocable release from carrying out work), that remuneration for the non-performance of employment is generally taxable in the employee’s country of residence. This also corresponds to the view of Germany’s Federal Fiscal Court. One argument in favour of the new legal regulation is that it is in line with the requirements of the OECD model commentary.

If the employee placed on gardening leave has a domestic employer, the remuneration earned during this period is subject to domestic wage tax deduction. Previously, this was not the case for employees with limited tax liability. This means domestic companies must check any existing domestic tax liability in each individual case.