Cross-border activities - New Federal Ministry of Finance circular provides only partial simplifications
A new circular from the Federal Ministry of Finance (Bundesministerium der Finanzen, BMF) on the application of DTAs in relation to income from cross-border activities, admittedly, contains an important simplification rule on proving the costs borne. Then again, based on a draft version of the circular, simplified determination of residency had also been expected - this was however deleted by the BMF.
The interests in the case of cross-border posting of employees
In the area of cross-border posting of employees between affiliated companies, the host company becomes the economic employer within the meaning of the agreements. The conditions require that the host company integrates the employee into the business and bears the economic cost of remuneration, or should have borne it in accordance with the arm's length principle. The allocation of the remuneration is assessed on the basis of in whose interests the employee has acted.
Simplification for proof of costs borne
The hitherto applicable provisions as per the BMF circular of 12.12.2023 were recently replaced by a simplification rule in the new BMF circular of 19.12.2025. According to this, a certificate from the employer sending out the employee that sets out the costs passed on to the host company in accordance with the arm's length principle would have an indicative effect.
The certificate needs to state the percentage of the remuneration components to be treated as wages and the other wage costs, in accordance with national tax law, that were directly passed on, taking into account the arm's length principle. If it is attested that all the costs associated with the posting of employees will be borne by the host company then there would be a rebuttable presumption that the employees’ activities were in the interests of the host company.
Furthermore, in the new administrative regulation, section 5.6 has been added to the chapter on determining the taxable or tax-exempt remuneration. This states that, for the purposes of applying the DBA, remuneration for periods of leave of absence pursuant to Section 50d(15) sentence 1 of the German Income Tax Act will be attributed to the country where activities were performed without leave of absence. A DTA would only override this rule if a provision that deviates from this is expressly regulated in the DTA. This approach is explained by the BMF by means of several examples.
No simplification in the case of residency
Prior to the finalisation of the new BMF circular of 19.12.2025, a draft version was sent, on 21.8.2025, to associations for comment. Moreover, the draft version of the circular included provisions regarding the determination of residency within the meaning of a DTA for the purposes of the payroll tax deduction procedure. This was a simplification rule in the case of dual residency in both contracting states and the related issue of establishing where the centre of vital interests lies in order to be able to determine residency (the so-called tie-breaker rule). This simplification standard had been proposed because, frequently, it is not possible for employers to determine the centre of vital interests, or not without entailing a considerable effort. Under this standard, the centre of vital interests and thus the residency of employees who are posted for a period of more than three years would be the place where the family of married employees, who do not permanently live apart, predominantly resides. In the final version of the BMF circular of 19.12.2025, surprisingly, this simplification rule has now not been included.
