Germany–U.S. · Payroll & Wage Tax
German Wage Tax for Foreign Employers
When must a U.S. or other foreign employer withhold German wage tax, register in Germany or establish a German payroll? The answer does not depend solely on whether the employee works or is taxable in Germany. The employee's German income-tax liability and the employer's wage-tax withholding obligation must be analyzed separately.
Two Separate Levels
German Tax Liability Does Not Automatically Mean German Wage-Tax Withholding
If an employee physically works in Germany or is tax resident there, all or part of the employment income may be subject to German income tax. This does not automatically mean that every foreign employer must withhold German wage tax.
The employer's withholding obligation is governed in particular by Section 38 of the German Income Tax Act. A foreign company can be treated as a German employer for wage-tax purposes where it has, for example, a permanent establishment or permanent representative in Germany. Additional rules apply to foreign labor leasing and international employee assignments.
If the foreign employer has no German wage-tax withholding obligation, the employee's employment income can nevertheless remain taxable in Germany. Tax may then be collected through the German income-tax return and, where applicable, advance payments.
Framework
Three Questions Determine the German Payroll Result
Is the Employment Income Taxable in Germany?
Work location, tax residence and the Germany–U.S. treaty determine whether Germany may tax the employment income.
Who Is the Employer for Wage-Tax Purposes?
Key issues include a German permanent establishment or permanent representative, labor leasing and, for assignments, a German economic employer.
How Is the Tax Collected?
Depending on the result, tax is collected through German payroll withholding or through the employee's assessment and, where applicable, advance payments.
Section 38 EStG
When a Foreign Employer Becomes Subject to German Wage-Tax Withholding
A foreign employer can be treated as a domestic employer for German wage-tax purposes if it has in Germany, in particular, a permanent establishment or permanent representative within the meaning of German tax law. In that case, it generally must fulfill the German employer obligations for wage-tax withholding.
A separate statutory rule also covers certain foreign labor-leasing arrangements where employees are supplied to perform services in Germany.
- German permanent establishment of the foreign employer
- permanent representative in Germany
- foreign commercial labor leasing
- German economic employer in an international assignment
- wage-tax withholding and payroll records where withholding applies
- electronic wage-tax filings and payment to the tax office
International Employee Assignments
The German Host Company Can Become the Economic Employer
German Entity Bears the Compensation Cost
If an employee is assigned from abroad to a German group company and the German company economically bears the compensation for the work performed for it, the German company may be treated as the employer for wage-tax purposes.
Arm's-Length Cost Bearing Can Be Sufficient
The statutory rule can also apply where the German company should have borne the employment cost under the arm's-length principle. The salary does not have to be paid directly by the German company.
Cost Recharge Is an Important Indicator
If compensation paid by the foreign company is recharged to the German company, this is an important indicator of economic cost bearing.
Shadow Payroll
The salary may continue to be paid abroad while a parallel German tax payroll is maintained to calculate and remit German wage tax correctly.
German Payroll
What Is Required When German Wage-Tax Withholding Applies
Payroll Account
A German payroll account must be maintained for the employee, recording compensation items and the information relevant for wage-tax withholding.
Wage-Tax Filing
German wage tax withheld is generally reported electronically to the competent tax office and remitted within the applicable deadlines.
Capture All Compensation
In addition to base salary, bonus, equity compensation, benefits in kind, employer-paid benefits and compensation paid from abroad may be relevant.
Workdays and Treaty Relief
Where services are performed in both countries, German and foreign workdays should be documented. If the treaty does not grant Germany a taxing right over part of the compensation, relief in the German wage-tax process may need to be considered.
Wage-Tax Permanent Establishment
Payroll Permanent Establishment and Corporate Permanent Establishment Are Not the Same
German wage-tax law contains its own concept of a payroll permanent establishment for administering wage-tax withholding. In general, it refers to the German business or business unit where the employment income relevant for wage-tax purposes is determined.
For a foreign employer managed abroad with a permanent representative in Germany, the permanent representative's German residence or habitual abode can be relevant for wage-tax administration.
This payroll concept must be distinguished from the question of whether the foreign company has a corporate tax permanent establishment in Germany under domestic tax law or the applicable tax treaty.
Without German Wage-Tax Withholding
The Employee Can Still Owe German Income Tax Without a German Payroll
If a U.S. employer has no German permanent establishment, no permanent representative and no other statutory withholding nexus under Section 38 EStG, German wage-tax withholding may not be required. This does not eliminate the employee's German income-tax liability.
For permanent remote work from Germany, the employment income will often have to be reported in the German income-tax return. The German tax office may also assess income-tax advance payments.
- no automatic employer payroll merely because the employee has a German home office
- employee can nevertheless be fully taxable in Germany
- German income-tax return may be required
- advance payments may collect the tax during the year
- U.S. withholding and foreign tax credits require separate coordination
- social security must be analyzed independently from wage tax
Social Security
No German Wage-Tax Payroll Does Not Mean No German Employer Obligations
Wage tax and social security follow different rules. A foreign employer may have German social-security obligations even where it has no German wage-tax withholding obligation.
For employment permanently exercised in Germany, the Germany–U.S. Social Security Agreement generally assigns coverage to the German system unless a qualifying assignment or another exception applies. For a qualifying temporary assignment, home-country coverage may continue.
German wage tax, social security and employment-related registrations should therefore not be inferred from a single legal result.
Typical Situations
Foreign Employers and German Wage Tax in Practice
U.S. Employer, Employee Permanently Working From Germany
The employment income is generally taxable in Germany. Whether the U.S. employer itself must withhold German wage tax depends on the requirements of Section 38 EStG.
U.S. Group Assigns Employee to German Subsidiary
If the German company economically bears the compensation or should bear it at arm's length, it may become responsible for German wage-tax withholding.
U.S. Employer With German Permanent Establishment
If the foreign employer has a permanent establishment in Germany, it is generally treated as a domestic employer for German wage-tax withholding purposes.
Salary Continues Through U.S. Payroll
Payment abroad does not prevent German withholding. Where a German obligation exists, a shadow payroll may be necessary.
Work in Germany and the United States
Compensation generally needs to be allocated based on actual workdays. German withholding and treaty relief must be coordinated with U.S. taxation.
No German Employer Withholding Obligation
The employee can still owe German income tax and may need to pay it through assessment and advance payments.
Related Guidance
Related Topics
Frequently Asked Questions
German Wage Tax for Foreign Employers
Must a U.S. employer always withhold German wage tax if the employee works in Germany?
When is a foreign employer treated as a domestic employer for German wage-tax purposes?
What is an economic employer in an assignment?
What is a shadow payroll?
What happens if the foreign employer has no German wage-tax withholding obligation?
Is German social security automatically linked to German wage-tax withholding?
Germany–U.S. Tax Advice
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