Expat tax focus: Sending a US employee to Germany, part 1 of 2

If your US company plans to send workers to Germany for a year or more, you’ll need to be aware of some important obligations in order to be compliant in both the US and Germany. The good news is that Germany and the US have Income Tax Treaties and Totalization Agreements in place. As we’ll see, these agreements help you and your expat employees offset the effects of double taxation.

Because expatriate tax issues are intrinsically complex and defined by each unique situation, I’ll begin by listing some assumptions about a hypothetical expat assignment that I’ll use as an example throughout this two-part series. These assumptions reflect a typical expat assignment in Germany, based on my experience dealing with these types of scenarios. Your company’s situation may differ of course, but even if so the issues addressed in this series should help you formulate the right questions to ask when you seek expert advice. (I should also mention that the information contained in this series does not extend to immigration or permanent establishment issues.)

Here are the assumptions for our hypothetical assignment involving a US employee going to work in Germany:

• The assignment duration is 12 months (24 months maximum).
• The expat is considered a non-German tax resident for the duration of the assignment.
• The expat is being tax-equalized (i.e., the US company will ensure that the expat pays the same amount in taxes while in Germany than if he or she had remained in the US).
• The expat wishes to remain in US benefits plans (401[k], medical/dental insurance, etc.).
• The US company will bear the costs of the assignment without recharging them to its German entity (i.e., the Germany entity will not deduct the costs of the assignment for corporate tax purposes).

US-Germany tax treaty and German tax residency

When sending a US domestic worker to Germany on assignment, it is critical to first understand German laws related to tax residency. And US companies must know first and foremost that Germany has entered into a tax treaty with the US. Treaty rules override domestic tax-residence rules and allow individuals to avoid double taxation of personal income by the two jurisdictions involved (in this case, Germany and the US).

The provisions of the US-Germany Treaty (Article 4, Point 2, a) make reference to the term “permanent home” available to an individual in establishing his or her residency. Commentary on the convention defines permanent home as "the place in which an individual dwells with his family." Furthermore, the OECD draft indicates that the permanent home need only be "available to him/her." However, it must be available on a long-term or long-continued lease; otherwise, it will lack the requisite quality of “permanency.”

Determining an expat’s permanent home under treaty rules is not easy, and in fact it is too complicated to be addressed in depth here. Generally speaking, however, under treaty rules an expat that is not followed by his or her family on assignment and who maintains the property he or she owns in the US without selling or renting it, is likely to be considered a non-resident of Germany for the duration of the assignment. In this situation, the expat will only be taxable in Germany on his or her German-sourced income.

Again, each expat assignment must be considered on a case-by-case basis to assess German tax residency. Nearly all companies in such a situation will want to seek help from a third party to make this determination, as it will have consequences for both the company and the expat involved, including which tax authorities (German and/or US) will be collecting taxes and whether the taxes will be calculated based on German-sourced or worldwide income.

In part two of this two-part series, I’ll discuss drafting an expat assignment letter and maintaining compliance with both US and German tax laws.

Read part two of this series.