Based on the numerous double taxation treaties (DTT) Germany has concluded with other countries, the salary for work performed in German home offices is taxable in Germany as the country of treaty residence. Thus, the right of taxation is generally shifted from the original country of employment to Germany.
To mitigate the tax consequences of the home-working days caused by the pandemic, Germany has concluded consultation agreements with the following 6 countries: Belgium, France, Luxembourg, The Netherlands, Austria and Switzerland.
The agreements stipulate that days spent working from home due to COVID-19 may be deemed to be spent in the state where the employee would have carried out the work without the current COVID-19 measures. This allows for the option of taxing the German working days either in Germany or in the country of employment. Proof of taxation and employers’ certificates of days worked from home must be available.
It should be noted that these agreements do not apply to working days which would have been spent either in the home office or in a third country independently of COVID-19. Specifically, they do not apply to working days that are regularly exercised in the home office according to the employment contract.
Some employers may be concerned that home working will create a permanent establishment (PE), which would trigger new filing and tax obligations. However, it is rather unlikely that COVID-19 measures will create any changes to a PE determination. The exceptional and temporary change of the location from which the employees perform their work due to the coronavirus should not create new PEs. Similarly, the temporary conclusion of contracts from the home office due to the coronavirus should not create PEs for the businesses.
Concerning social security, the principle of territoriality applies. This means that the employee is, in principle, subject to social security in the country where the work is carried out. In the event of secondment, regulations deviating from the territoriality principle are possible, which must be applied for in the context of an A1 certificate, for example. In the event of an interruption of a secondment due to the coronavirus, which does not exceed 2 months and does not extend the total duration of the secondment, the A1 certificates issued remain valid.
In the event of employees who regularly work in several EU member states on a recurring basis, the application of social security law depends on the extent of the activity in the respective member states. A coronavirus-related different distribution of the activity in the respective states does not, however, lead to a different assessment.
The consultation agreements will be cancelled at the end of the coronavirus crisis. Then, only the general provisions of the DTT shall apply. These assign the right of taxation for German home-working days to Germany as the country of treaty residence.
A review of the risk of establishing a PE due to home working should be carried out carefully. This is because, unlike coronavirus-related home office activities, home office activities are designed to be permanent. In case of a PE, withholding payments will be due.
Concerning social security, the performance of work in the home office can lead to a shift in the applicable social security law. It is strongly recommended to check this before starting the activity from home.
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