During the year a Ukrainian resident employed by a representative office of a German company in Ukraine has come to Germany and is working remotely for the Ukrainian office. His salary is still paid from Ukraine where tax withholding applies. The residence in Ukraine was kept and still represents the centre of his vital interests. As the relocation to Germany was caused by the ongoing combat activities in Ukraine, working from Germany is planned only as a temporary solution. Art. 16, 18, 19 and 20 DTT Germany - Ukraine are not applicable.
Based on Art. 15 para. 1 of the Double Tax Treaty between Ukraine and Germany, the right of taxation is allocated to the residence state (due to Art. 4 DTT Ukraine - Germany) of the individual who represents Ukraine in this scenario. In addition, para. 1 includes that the taxation right is reassigned to the other contracting country (here: Germany), if the employee is actually performing their work in this state. As a result, Germany holds the taxation right relating to the salary of the individual paid for their work performed in Germany. Following this approach, the salary of the respective individual is liable to German tax starting from the beginning of their activity in Germany.
However, there is the possibility that the taxation right applies to the residency state due to Art. 15 para. 2 DTT Ukraine - Germany. This legal standard indicates three requirements which must be fulfilled simultaneously in order to allocate the taxation right back to Ukraine.
Due to the interpretation from a German tax perspective the representative office in Ukraine pays the salary on the behalf of the German employer. Thus, the requirements of the relevant standard are not fulfilled simultaneously and a review of the third condition is not required. As a result, the exception from para. 2 is not applicable to this case.
This leads to the conclusion that Art. 15 para. 1 DTT Ukraine – Germany is decisive and implies that the salary relating to any working day performed in Germany is liable to German tax.
Due to domestic tax law, the German employer has an obligation to withhold wage tax from the salary relating to German workdays of the employee. There is no possibility to avoid a double taxation from the German side and there is currently no jurisdiction applicable to cases which are caused by comparable exceptional circumstances (e.g. combat activities).
We recommend reviewing those scenarios from the tax perspective of the foreign country in order to prevent double taxation. In our case, the treaty override was solved by closing local contracts between the employee and the German employer.
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