Being prepared for the 2020 French and German tax return filing season

There is a consultation agreement between France and Germany which should mitigate the tax consequences of home-working days caused by the pandemic. In this regard, we refer to our previous WTS Global Mobility Newsletter. This consultation agreement stipulates that days spent working from the home office due to the COVID-19 pandemic 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 gives the employee the right to choose taxation of the salary related to the work days in the country of treaty residency or in the country of employment.

Since taxation in France and Germany is very different, this option should be exercised carefully in order to benefit from the lowest taxation.

In the rarest of cases, this option will already have been implemented for payroll tax purposes in 2020. The option therefore needs to be exercised within the French and German income tax returns. The tendency is to assume that taxation in France is more favourable than taxation in Germany. The option will therefore probably be decided in favour of France in most cases. If in doubt, a comparative calculation should provide clarity.

The consultation agreement remains in force. It can be terminated by one of the contracting parties with one week’s notice before the beginning of the following calendar month. Since, according to current knowledge, the pandemic will remain with us for several months into 2021, it is not expected that the consultation agreement will be cancelled for the time being.

For 2021, this raises the question of whether exercising the option should not already be taken into account in the context of payroll tax withholding. This means that the more favourable taxation will not have to wait until income tax returns are filed in both countries. We would be happy to offer support with the corresponding implementation.

Read the WTS Global Mobility Newsletter here