International executives in the sights of the German tax authorities

I. Current experience from wage tax practice

In practice, there are more and more cases in which the tax authorities are increasingly scrutinizing managing directors, board members and, in some cases, authorized signatories of German corporations who are resident abroad and work for a German corporation from there. This is regularly done as part of wage tax audits. In some cases, preliminary criminal investigations are also started immediately. The tax authorities check whether there is an obligation on the part of the employer to withhold German wage tax and whether it has existed in the past (up to ten years).

II. Pitfalls for managers

At first glance, one would not suspect that an executive working abroad is subject to taxation in Germany with his salary. In this case, the tax principle of the place of work principle applies. This principle states that the remuneration of employees is subject to taxation where they carry out their work. This means that employees working abroad are subject to taxation with their remuneration in the foreign country of employment. But as we all know, the devil is in the details. There are some exceptions to this principle, which have recently led to some unpleasant surprises among foreign executives of German real estate companies.

III. Persons affected

This applies to foreign managing directors, board members and, if applicable, authorised signatories of German corporations who are subject to a double taxation agreement (DTA) which, in deviation from the principle of place of work, assigns Germany the right to tax the remuneration of managing directors and board members by means of a special regulation, even if they do not carry out their activities in Germany. In Europe, these agreements include the DTAs with Austria, Belgium, Denmark, the Netherlands, Poland, Sweden and Switzerland.

IV. Risk of economic employers

Another risk arises if a foreign executive works for several companies but does not receive any remuneration from the German company. The tax authorities argue that the entry in the commercial register as a managing director, board member or authorized signatory is associated with obligations and liability risks that are usually only assumed against payment. Therefore, they consider that part of the remuneration paid by the foreign company – with which the formal employment contract exists – must be attributed to Germany and taxed by the German company as the economic employer. An obligation to withhold wage tax arises for the German company as an economic employer (Section 38 paragraph 1 sentence 2 German Income Tax Act) if the foreign executive also works for the German company in Germany. Since the wage tax assessment bases often cannot be clearly determined retrospectively because the distribution of the (foreign) total remuneration is not documented, there is a risk that the tax authorities will overestimate the German share.

V. How can you protect yourself from these risks?

VI. Summary