COVID-19 – Mutual agreements on tax treatment of home office activities by cross-border commuters between Germany and its bordering states

• Germany

• Coronavirus - Country overview
• Coronavirus - Tax issues
• Tax planning and consultancy

07-01-2021

Germany has concluded several mutual agreements (Konsultationsvereinbarungen) for COVID-19 related home office activities of cross-border commuters with its bordering states (i.e. Austria, France, Luxembourg, Poland, Switzerland and the Netherlands), which relate to the application of the respective Double Taxation Treaties.

Background

Where employees resident in Germany come to a bordering state for working, as a general rule, the salary for working days in the bordering state is to be taxed in the bordering state if the employer is resident in the bordering state. Contrary to that home office days of employees with German residence are usually taxed in Germany even if the work is performed for an employer resident in a bordering state. The same principles apply in the reverse case where employees resident in a bordering state work for an employer resident in Germany.

Because of the current travel restrictions due to the COVID-19 pandemic cross-border commuters will have to stay in their state of residence and have to work from their home office.

If more days of work are performed in the state of residence, for example Germany, this usually leads to an increase in the tax base in Germany. Depending on the tax rate in the respective states, this can lead to a significantly higher or lower overall tax burden for cross-border commuters in times of the COVID-19 pandemic.

Fiction regarding home office activities

Under the mutual agreements and concerning COVID-19 related home office activities, each activity is deemed to have been performed in the contracting state in which the employee would have carried out his/her activity without the COVID-19 pandemic.

Example: Where an employee who usually lives in Germany and works in Poland has to work in his/her home office in Germany due to the COVID-19 pandemic, his/her activity is deemed to have been performed in Poland.

Only COVID-19 related cases

This exemption only applies to COVID-19 related cases. It does not apply to working days that would have been spent either in the home office or in a third country regardless of the restrictions resulting from the COVID-19 pandemic. In particular, the exemption does not apply if the employee in general or to a certain extend works in his/her home office in accordance with the provisions under the employment contract.

The exemption only applies to the extent that the salary attributable to the home office working days is actually taxed by the contracting state in which the cross-border commuter would have performed the work in the absence of the COVID-19 pandemic measures. Such income shall be deemed to be taxed if it is included in the tax base of which the tax is calculated.

Application period

The aforementioned regulations explicitly apply to activities conducted between 11 March 2020 to 31 December 2020 (for Austria, Luxembourg and Poland) or between 11 March 2011 to 31 March 2021 (for France, Switzerland and the Netherlands).

Nonetheless, the regulations of all mutual agreements are extended on a rolling basis unless terminated by either contracting state.

Documentation

Cross-border commuters who make use of the exemption are obliged to apply for this exemption uniformly in Germany and its bordering state and to keep appropriate documentation. However, under the agreements it should be sufficient, that the employer issues a certificate disclosing the working days the employee has carried out his/her activities in his/her home office solely due to the COVID 19 pandemic.

Cross-border home office: permanent establishment risks

Home office activities can also entail risks, especially if the cross-border commuters concerned are allowed to negotiate and sign contracts in the home office on behalf of the employer company. This then may result in a corporate income tax liability for their employer company in the cross-border commuters state of residence. Furthermore, payroll tax withholding obligation for the employer may be entailed in the cross-border commuters state of residence.

List of contracting states and links to the mutual agreements:

Austria (15 April/27 October 2020)

France (13 May 2020 and extension 7 December 2020)

Luxembourg (7 October 2020)

Netherlands (6 April 2020 and extension 9 December 2020)

Poland (12/27 November 2020)

Switzerland (11 June 2020 and extension 30 November 2020)