Wage Tax Obligations in Germany for Foreign Companies Establishing a Permanent Establishment

At WW+KN, a Baker Tilly Company, we understand the complexities of wage tax obligations when a foreign company establishes a permanent establishment (Betriebsstätte) in Germany. For detailed inquiries, please contact us at info@payrollgermany.de. Below, we provide an extensive guide on when wage tax (Lohnsteuer) must be withheld and paid, supported by relevant legal references.

1. Definition of Permanent Establishment

According to § 12 of the German Fiscal Code (Abgabenordnung – AO), a permanent establishment is a fixed place of business through which the business activities of an enterprise are wholly or partly carried out. This includes:

  • Offices
  • Branches
  • Factories
  • Workshops
  • Construction sites lasting more than six months

2. Wage Tax Obligations for Foreign Companies

When a foreign company establishes a permanent establishment in Germany, it becomes subject to German wage tax obligations for employees working within that establishment.

Key Points:

  • Employer’s Obligation: The foreign company, now considered an employer in Germany, must withhold wage tax from the salaries of its employees and remit it to the German tax authorities (§ 38 EStG – Einkommensteuergesetz).
  • Registration: The employer must register with the German tax office (Finanzamt) to obtain a tax number for wage tax purposes.
  • Monthly Remittance: Wage tax must be remitted monthly, with due dates depending on the size of the company’s payroll (generally by the 10th day of the following month).

3. Taxation Under Double Taxation Agreements (DBA)

Germany has entered into Double Taxation Agreements (DBA) with numerous countries to prevent double taxation of income. The specific provisions of these agreements can affect wage tax obligations.

When DBA Applies:

  • Tax Residency: The employee’s tax residency determines which country has the primary right to tax their income.
  • Permanent Establishment Clause: If a permanent establishment exists in Germany, wage income related to that establishment is typically taxed in Germany, as per the OECD Model Tax Convention adopted in most DBAs (§ 49 Abs. 1 Nr. 4 EStG).

Example:

  • US.-Germany DBA: An American company with a permanent establishment in Germany must withhold German wage tax for employees working in Germany. The U.S.-Germany DBA will ensure that the employee is not doubly taxed by allowing a credit or exemption in the U.S.

4. Permanent Establishment Timelines in DBAs

Different DBAs specify varying timelines for when a construction site or installation project constitutes a permanent establishment. These timelines can be within a calendar year or over a continuous period. Here are the details for some countries:

12 Months within Any 12-Month Period:

  • United States
  • France
  • Spain
  • United Kingdom
  • Italy
  • Romania
  • Bulgaria
  • Slovakia
  • Poland
  • Czech Republic
  • Hungary
  • Portugal
  • Netherlands
  • Belgium

For construction projects or installations lasting longer than these specified periods, a permanent establishment is created, triggering wage tax obligations in Germany.

5. Wage Tax for Employees Without a Permanent Establishment

Foreign companies without a permanent establishment in Germany may still be subject to wage tax obligations under certain conditions.

Key Scenarios:

  • No Permanent Establishment: If an employee is working in Germany for more than 183 days in a calendar year, the employer must withhold wage tax, even without a permanent establishment, under the 183-day rule (§ 49 Abs. 1 Nr. 4 EStG).
  • Economic Employer Concept: In some cases, if the employee is effectively under the control and responsibility of a German entity, the wage tax obligation might shift to the German entity (Substance Over Form principle).

Example:

  • Project-Based Employment: A UK company sends an employee to work on a project in Germany for more than 183 days. Even without a permanent establishment, the UK company must register and remit wage tax to the German authorities.

6. Practical Steps and Compliance

Registration Process:

  • Foreign employers must register with the German tax authorities to obtain a tax number.
  • Timely filing and remittance of wage tax are crucial to avoid penalties.

Documentation:

  • Maintain detailed records of employee workdays in Germany.
  • Ensure compliance with both German tax laws and applicable DBAs.

Professional Guidance:

  • Consulting with tax professionals like WW+KN ensures compliance and efficient handling of wage tax obligations.

Contact Information: For personalized support, please contact us at info@payrollgermany.de.

By understanding and adhering to these provisions, foreign companies can ensure compliance with German wage tax obligations, whether they have a permanent establishment in Germany or not.

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