Anyone posted outside of Europe usually pays less tax in Germany. This has consequences for the deductibility of costs.
(Photo: dpa)
Berlin Whether as preparation for the next step up the career ladder in the company or as part of a promotion – working abroad holds many challenges in store for employees.
In addition to the different culture and the tasks at work, it is also important to make provisions right from the start for the later return to Germany. However, there are pitfalls lurking, for example, due to different taxation regulations.
This is all the more true if the new position is in a branch outside the European Union or the European Economic Area.
If the workplace is in such a third country, pension expenses such as contributions to pension and unemployment insurance are not deductible as special expenses if the wages earned are tax-free in Germany. A so-called expat had to find out about this, on whose case the Federal Fiscal Court has currently decided (Az. XR 25/21).
The man had been sent temporarily to the People’s Republic of China by his German employer. During this time, however, he retained his residence in Germany. In the year under dispute, 12.28 percent of his income came from his domestic work and 87.72 percent from his work in China.
Taxation when working in a third country
When determining the man’s income tax, the tax office took into account the double taxation agreement with China. According to this, only the part of his wages that was attributable to the domestic activity was subject to taxation. The remaining income from work was made tax-free subject to progression.
Accordingly, the authorities included only 12.28 percent of the contributions to unemployment and pension insurance claimed as special expenses in the pension expenses. The remainder was allocated to tax-free income and was therefore not deductible.
The expat appealed against this decision to the Hamburg Finance Court. However, the judges there saw the ban on deduction as constitutional and dismissed the man’s complaint. In her opinion, this also applies if the pension expenses in China cannot be taken into account as a tax reduction. The Federal Fiscal Court subsequently agreed with this assessment by the lower court and dismissed the appeal as unfounded.
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In principle, the Income Tax Act excludes the deduction of pension expenses as special expenses if they are in direct economic connection with tax-free income. Due to the freedom of movement for workers, there are only exceptions for activities in EU or EEA member states and in Switzerland.
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In the present case of the expat in China, the pension provision was already made from income that remained tax-free in the country and therefore a double exemption is not necessary. Allocation of the contributions to the special editions instead of to the income-related expenses is also excluded.
Nevertheless, double taxation is possible in relation to the pension with its subsequent taxation in the payment phase, the judges conceded. Proceedings are currently underway before the Federal Constitutional Court as to how double taxation would have to be proven (Az. 2 BvR 1143/21 and 2 BvR 1140/21).
Practical tip: what to consider for tax purposes when working abroad
The habitual place of residence is decisive for the tax liability. The taxpayer must live there for more than six months a year. Accordingly, he remains taxable with all income in Germany if he works abroad for a shorter period of time. This also includes those generated abroad. If he works abroad for more than six months, the country of work is subject to income tax. If you continue to live in Germany, you will still be subject to tax in Germany, but you can have the income taxes paid abroad offset.
More: Double taxation – pension notices are now only provisional