Avoiding double taxation
If an employee normally works abroad then the income has to be taxed abroad. In addition, because the employee’s residency is in Germany it, too, has a right to tax. To prevent double taxation, in Germany, the income is exempted from tax under the so-called exemption method. Generally, when this method is used it is irrelevant whether or not the foreign country where the employee works exercises its right to tax. Although, the condition for applying the exemption method in Germany is that the income also actually has to be taxed abroad. Taxation in Germany would also be possible if only parts of the income were not taxed abroad.
Differing legal situations in Germany and the Netherlands
Recently, an employee who lives in Germany and had received remuneration from his Dutch employer brought a legal action before the Düsseldorf tax court. In the Netherlands, employees who take up a job there and, for this reason, move house or travel daily from another country to the Netherlands get a refund. Employees are thus supposed to be compensated for the additional costs that arise for them as a result of their stay in the Netherlands. As an alternative to the option of having the additional costs refunded, employers are also able to pay out 30% of the remuneration free of tax. With this alternative it is not necessary to show the costs that have actually arisen. The only requirement is that the employee has to have special expertise in a specific sector.
In Germany, the competent local tax office did not fully exempt the claimant’s foreign income, but instead made the portion of the income (30%) that was not taxed in the Netherlands subject to German tax. The DTA with the Netherlands provides for the income in the Netherlands to also “actually be taxed”.
Only the portion that is actually taxed abroad will be exempted
However, according to Germany’s legal position, if the income abroad is only partially taxed then this would not be sufficient in order to fully exempt the income from tax in Germany. On that point, the Düsseldorf tax court decided on 25.10.2022 (case reference: 13 K 2867/20 E) that the portions of the remuneration that would not be taxed in Germany would be solely the ones that had been taxed abroad. Accordingly, in this case the 30% that would not be taxed in the Netherlands would have to be subjected to German tax. Admittedly, in Germany portions of income are also generally not taxed (the so-called standard deduction amount). However, the 30% rule is more comparable with a basic tax exemption than with a generalisation provision.
Outcome: In order to avoid a significant overcompensation of the actual expenses, in Germany, only the portion that has actually been taxed abroad was accordingly exempted.