Wage Tax Guidelines 2023: Increased German wage tax burden for employees partly working in Germany

The German Federal Ministry of Finance has recently published its amended Wage Tax Guidelines 2023. These are applicable as of 1 January 2023. The Wage Tax Guidelines are a general administrative regulation issued by the German Federal Ministry of Finance to ensure the uniform application of employee taxation by tax offices in Germany. The Wage Tax Guidelines 2023 has been slightly amended and now contains Sec. 39b.5 (2). This amendment is of high relevance for the calculation of the German wage tax burden of employees partly working in Germany.

Determining the wage tax payment period

Sec 39b.5 (2) of the Wage Tax Guidelines 2023 concerns the determination of the wage tax payment period according to Sec. 39b (2) of the German Income Tax Act (“GITA”). The wage tax payment period is relevant for the calculation of the German wage tax burden. The German wage tax burden depends on whether the daily or the monthly wage tax table is applicable. In the case of a partial wage tax payment period, the employer must apply the daily wage tax table when calculating the German wage tax burden. The daily wage tax table triggers a higher wage tax burden than the monthly table.

The question regarding the applicable wage tax table is especially relevant if the employee does not perform all his or her working days in one month in Germany and the income which is attributable to the employee’s non-German working days is exempt from taxation in Germany according to a DTT (or – in the case of foreign working days – as stated in the Decree on Employment Abroad [“ATE”], Federal Ministry of Finance, 10 June 2022, Federal Tax Gazette I 2022, 997).

From a practical point of view these requirements are met if a German employee performs his or her activities for his or her employer abroad and the remuneration attributable to these working days (the non-German working days) is – according to a DTT – exempt from taxation. The requirements are also met in the case of foreign employees partly working for a German employer in Germany. In this case, only the remuneration which is attributable to the German working days (the taxable German working days) is taxable in Germany within the employees’ limited German tax liability.

Determination of the wage tax payment period according to the Wage Tax Guidelines 2023

According to the previous version of Sec. 39b.5 (2) of the Wage Tax Guidelines, working days which are not subject to taxation in Germany (the non-German working days) belong for the determination of the wage tax payment period to the employee’s working days in Germany. The consequence was that there was no partial wage tax payment period. The monthly wage tax table was applicable when calculating the German wage tax burden.

According to the amended version of Sec. 39b.5 (2) of the Wage Tax Guidelines 2023, an employee’s working days which are not taxable in Germany (the non-German working days) are no longer to be counted when determining the wage tax payment period. The consequence of this is the creation of a partial wage tax payment period. The German employer is therefore obliged to apply the wage tax daily table when calculating the German wage tax burden. The amended opinion of the German Federal Ministry of Finance triggers, in principle, a higher German wage tax burden.

Example

An employee with residency abroad works 10 days per month for a German subsidiary which qualifies as the employee’s economic employer. The remuneration attributable to the employee’s German working days is EUR 3,000. When applying the monthly wage tax table in December 2022, the German wage tax burden is EUR 455. When applying the daily wage tax table in January 2023, the German wage tax burden is EUR 909 plus EUR 49 solidarity surcharge. This means that in the example calculation the amended opinion of the German tax authorities triggers an additional (monthly) German wage tax burden of EUR 503 within the employee’s limited German tax liability. Regularly, the employer will be obliged the bear the higher German tax burden within a net wage agreement.

It appears debatable as to whether Sec 39b.5 (2) of the Wage Tax Guidelines 2023 is in line with the unmodified Sec. 39b (2) GITA. It should be noted that the amended opinion of the Federal Ministry of Finance is not supported by the wording of Sec. 39b (2) GITA. Therefore, it seems advisable that the opinion of the German Federal Ministry of Finance should be reviewed within a fiscal court proceeding.

Consequences

The amended version of Sec. 39b.5 (2) of the Wage Tax Guidelines 2023 triggers a higher German income tax burden if not all working days of a month are taxable in Germany. For employees working in Germany who are subject to limited German income tax liability, the wage tax burden has a definite effect. Only employees who are nationals of an EU/EWR state are entitled to apply for an assessment for income tax purposes in Germany. Thereby, it must be considered that the employee’s income which is not subject to taxation in Germany is subject to the German progression clause. This triggers a higher tax rate for the income subject to taxation in Germany.