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Germany Cross-Border Staff Secondment – Liability For Wage Tax?

July 27, 2022

AGN EMEA Taxation Task Force (TTF) Newsletter

The decisive factor for wage tax liability in the international assignment of employees is which state is entitled to the right of taxation and who has to pay the wage tax. In many cases, it depends on who is regarded as the “economic employer”.

The identification of the economic employer is already (in retrospect) an issue questioned by the tax authorities and companies. German law stipulates that the economic employer has to withhold wage tax. This law applies in particular to cases in which a foreign employee holds temporary employment by a group company in Germany, and this company is regarded as the economic employer.

The German Federal Fiscal Court has now repeatedly dealt with such a question.

When German Tax Authorities Assessed Wage Tax for Payments to a Foreign Company

The German Federal Fiscal Court judged the complaint of a German subsidiary of a corporation domiciled in Switzerland. The two companies had concluded a service agreement by which the Swiss company made one of its employees available as Managing Director to its German subsidiary to fill a vacancy in management.

The Managing Director was simultaneously the CEO and the only shareholder of the Swiss parent company. The monthly fee for the service was set based on the salary of the previous German Managing Director. The German tax authorities were of the opinion that the payments to the Swiss company should be subject to German wage tax and therefore issued a corresponding liability notice to the German subsidiary.

The Federal Fiscal Court found that the German host company did not become an employer, which was liable to withhold wage tax. The company only paid a monthly service fee to the Swiss parent company for the services rendered by the Managing Director.

The following statements were relevant:

Service Agreement has no link to the Swiss Remuneration of the Director

The mere agreement of a compensation payment between the companies was not sufficient for wage tax. Since there had been no connection between the agreed fee – which in this case was based on the previous Managing Director – and the Swiss remuneration received by the managing director, the German company did not take the remuneration.

Instead, it was simply a service rendered between the companies whose financial benefit was the remuneration for the Managing Director.

Activity Must Be Beneficial to the German Company

This was the case here since the appointment of a Managing Director was typically in the company’s own interest. The interest of the Swiss shareholder was subordinate.

No Integration into the Receiving Company’s Work Process

According to the Federal Fiscal Court, a Managing Director is not automatically integrated into the hierarchy and the processes of a company because he is at the top. In the case of a Managing Director, a distinction has to be made between the appointment as a representative body according to corporate law and the employment relationship.

The general criteria for distinguishing self-employed from non-self-employed activities apply. Therefore, the activities of the Managing Director of a private limited company (i.e. a GmbH) must be assessed by primarily considering the circumstances of the individual’s case and not overall, the Managing Director’s position as a member of the executive body.

Remuneration Has to Be at Arm’s Length

If it is not the case, the excessive part can be qualified as a hidden profit distribution and not as payment of wages. Withholding tax on the hidden profits has to be deducted.


It is recommended to draw up a contract with detailed clauses that the two parties
had agreed on. Each individual case has to be checked and verified.

Furthermore, wage tax liability should be clarified with the tax authorities – it is recommended to obtain a payroll tax ruling for legal security. However, whether a managing permanent establishment is set up, it must be checked and verified.

If you have any questions regarding taxes in Germany, please get in touch with Christine Ries.

Christine Ries
Tax Consultant & Certified Advisor in International Taxation
WirtschaftsTreuhand GmbH