Germany: Treaty override regarding German assignees working for a Chinese company

Case

The individual here represents a treaty resident of Germany as defined by Art. 4 DTT Germa­ny - China. He was seconded from Germany to China. Due to the restrictions referring to the Covid-19 pandemic, he was working (partially) remotely from Germany for the Chinese company. As soon as the employee starts his work for the Chinese company, there is an obligation to pay Chinese income tax, even if the work is not performed there. Art. 16, 18, 19, 20 and 21 DTT Germany - China are not applicable.

German legal perspective

Based on Art. 15 para. 1 DTT Germany – China, the right of taxation of employment income is basically allocated to the residency state of an individual (here: Germany). Only if the individual is performing their work in another country are the taxation rights reassigned to the country where the work is actually carried out. Consequently, Germany holds the taxation right regarding the portion of salary which is paid for their working days spent in Germany. Following this approach, the salary of the respective individual is liable to German tax starting from the first day of work in Germany. Para. 2 of the mentioned legal standard is not applicable to the scenario in question as it exclusively contains the regula­tion of the exception that the taxation right falls back to the residence state. This would also allow Germany to tax the corresponding working days.

As a result, from a German perspective the Chinese taxation of the German working days performed during their assignment to China leads to a treaty override. This problem appears also on all comparable cases in Germany where working remotely for the Chinese company is not caused by the restrictions resulting from the Covid-19 pandemic.

Only the application for a mutual agreement between both states on the basis of the DTT Germany - China or a request of a payroll tax ruling for these specific cases by the German tax authorities could be helpful to avoid the German taxation. These tedious procedures might take up to several years and are therefore not feasible.

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 could only be solved for Chinese tax residents by crediting the German taxes in China. For future cases, one of the following methods can be used for German residents:

• The assignment agreement should only be effective after the employee has obtained a valid work permit and resident permit in China. Prior to this date, their overseas contract must still be valid. The personal cost-bearing status also has to be in line with the men­tioned timing of the assignment. This means that no cost is paid or borne by the Chinese entity unless the assignee’s assignment agreement enters into force.
• The arrangement of an overseas position for the assignee at the same time that the Chinese assignment becomes effective. In that case, a time apportionment method could still apply and they will not be taxed in China unless they are physically in China.
   

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