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Your non-German employer sent you to Germany?

There are two ways this can happen:

The following assumes that your employer does not have a permanent establishment (Betriebsstätte) in Germany as laid down in the double taxation agreement between their home country and Germany.

Alternative 1: You were posted/seconded to Germany on a non-German contract

Being posted/seconded is the only allowed possibility to work in Germany on a non-German employment contract (though there are exceptions for diplomats or if your employer is an EU or international organisation, e.g. for the EPO – European Patent Office, right here in Munich).

Being posted/seconded is only possible if:

The maximum period you can remain posted/seconded is 5 years.
If you were posted/seconded from an EU/EEA state or from Switzerland, there is an initial period of up to 2 years, which can be extended, details in here

If you were officially posted/seconded, you will:

  1. continue to pay social security contributions in your home country, i.e. you will remain in your home country’s public pension, unemployment and health insurance system
  2. start to pay income tax to Germany instead of to your home country if you came to Germany with the intention to stay for more than 183 days.
    Your employer will no longer deduct your home country income tax from your salary every month. Even if you didn’t know from the start that you would stay that long, once the 183 days have passed you will retroactively owe German income tax from the start of your stay.


    Exception:
    If you knew from the start that you will only be working in Germany for up to 183 days (whether these 183 days are within a calendar year, tax year or a revolving 12 month period depends on the specific double taxation agreement), and if your salary is being paid directly by your non-German employer, you will continue paying income tax to your home country even during your stint in Germany.
    This clause is contained in all double taxation agreements, but it only applies if your country of residence (Ansässigkeitsstaat) remains your home country, with Germany only being the country the work is being carried out in (Tätigkeitsstaat). So for this clause to be applicable, you are not allowed to establish residence in Germany. The Finanzamt has some indicators for residency, e.g. registering your address at the Bürgerbüro or renting an apartment on an unlimited rental contract or on a rental contract that runs for more than 183 days.
    So if you want to use this clause, it’s safer to stick to hotels or holiday apartments during your stay, so as not to give any indication of residency. The problem is that once you have established residence in Germany, you have to pay German income tax, even if you end up staying for less than 183 days.

    By the way, if your salary is paid (or even only borne, however indirectly) by a German permanent establishment of your non-German employer, you have to pay German income tax even if you only stay for up to 183 days and even it was planned from the very start that you would only stay for such a short time!

If you do have to pay income tax to Germany, you will have to save your income tax every month during the first year (I can tell you how much to save, don’t go spending that money, it’s not yours!) and at the end of the year, you have to file a German income tax return (which I can do for you).

The Finanzamt will then issue a Bescheid telling you how much German income tax you will have to pay for the past calendar year, and you then pay it:

  • if you gave the Finanzamt a SEPA-Lastschriftmandat, i.e. permission to take money out of your bank account, they will do so (I strongly suggest to do so to all my clients, that way you can never miss a payment deadline).
  • if you didn’t give the Finanzamt permission to take that money out of your bank account, you will have to initiate a bank transfer into the Finanzamt’s bank account before the deadline written in the Bescheid.

Based on the tax you had to pay in the German income tax return for the first year of your stay in Germany, the Finanzamt will from the second year of your stay ask you to prepay your German income tax 4 times a year, on:

  • 10. March
  • 10. June
  • 10. September
  • 10. December

I can prepare and file the income tax return for you.

How much will "Alternative 1" cost?

To find out how much your mandatory income tax return will cost, please consult the Cost page.

You should negotiate with your employer that they cover the cost of your income tax return, by arguing that this additional costs was caused by you being posted/seconded. Back in your home country, your employer simply deducted the income tax at the source, now just because you were sent to Germany, you have this additional cost.

However, even if you do manage to negotiate this, you should know that you will still end up paying something, to be exact: extra German income tax.
The problem is that the fact of your employer covering the cost of “your” income tax return is seen as a benefit in kind, which has to be taxed as income.
So your taxable income rises by my fee for that tax return.

Example:

  • my invoice for your tax return was 595€.
  • your personal income tax rate is 30%.

→ Your employer paying my invoice will end up costing you 178.50€ in extra income tax. 

But at least you wouldn’t be paying my 595€ fee for the income tax return, your employer would.
So look on the bright side: paying 178.50€ is preferable to paying 595€.

Alternative 2: You were hired by a non-German employer on a German employment contract

Since this is a German employment contract, you will have to pay both social security contributions and income tax to Germany, just like any other employee in Germany.

I can do the payroll accounting, i.e. calculate every month how much in social security deductions and income tax is due and file the monthly social security announcement at the German institutions.

Your non-German employer (or I for them) would have to apply for a Betriebsnummer (company registration number) at the Bundesagentur für Arbeit (labour bureau), under which the social security contributions would be paid.
Getting a Betriebsnummer in itself does not mean that your company establishes a permanent establishment in the tax sense in Germany, it is just something that is necessary to correctly allocate the social security contributions.
Your non-German employer would only establish a permanent establishment in the tax sense (which would mean owing German tax on the part of their profits generated in Germany!) if they fulfill the conditions set down for that in the double taxation agreement between their country and Germany. Most of these conditions are logical, e.g. if your non-German employer has an office in Germany through which they carry out business, that would be a permanent establishment and therefore taxable in Germany. However, there is also a more insidious condition that also leads to a permanent establishment: it’s enough if you as their employee “have, and habitually exercise, an authority to conclude contracts on behalf of your employer” and they will suddenly have a permanent establishment in Germany.
So if your employer wants to avoid taxing a part of their profits in Germany, they had better not give you such authority.

But let’s leave the higher spheres of international tax law and go back to the nitty-gritty of German payroll accounting.

Since your employer is non-German, they are not obliged to deduct the German income tax from your salary every month and forward it to the Finanzamt, like German employers have to, §38 (1) EStG.
So it will always fall to you to pay the income tax that’s due on your salary to the Finanzamt.

Regarding German social security contributions, the law does not differentiate between German and non-German employers.
So your non-German employer would – in theory – have to deduct the employee part of the German social security contributions from your salary every month, and forward them (and their own employer part of the social security contributions) to the proper German social security institutions.
However, in practice, nearly all non-German employers use article 21 no. 2 of the EC regulation 987/2009 which allows them to come to an agreement with you, the employee, to forward the social security contributions for them. And you will agree to do so if you want that job.
It is a good idea to already include this agreement as a clause in your German employment contract, should the German social security institutions ever ask to see it.

In summary, there are two options:

  • very unlikely: that your employer transfers the social security contributions (their employer part and your employee part) directly every month to the German institutions (or if your employer is from a SEPA country, gives these institutions permission to take that money out of their bank account).
    Your employer then transfers what’s left of your gross salary, i.e. (gross_salary – employee_social_security_contributions) to you.
    The German income tax is paid by you to the Finanzamt after your yearly income tax return for the first year. Ideally, you will have been saving how much I told you to save each month, knowing that that money wasn’t really yours and that you will have to forward that tax money to the Finanzamt in the end.
    From the second year, you prepay your German income tax every quarter to the Finanzamt, on 10. March, 10. June, 10. September and 10. December.
    I strongly suggest that you give the Finanzamt a SEPA-Lastschriftmandat, i.e. permission to take the income tax out of your bank account themselves, that way you can never miss a payment deadline.
  • nearly always: your employer transfers you your gross salary, i.e. without any deductions, plus the employer’s part of the social security contributions, and you transfer the entire employer and employee social security contributions (AG=Arbeitgeber=employer and AN= Arbeitnehmer=employee) every month to the German institutions (or give these institutions permission to take that money out of your bank account, which I strongly suggest).
    The German income tax is paid by you to the Finanzamt after your yearly income tax return for the first year. Ideally, you will have been saving how much I told you to save each month, knowing that that money wasn’t really yours and that you will have to forward that tax money to the Finanzamt in the end.
    From the second year, you prepay your German income tax every quarter to the Finanzamt, on 10. March, 10. June, 10. September and 10. December.
    I strongly suggest that you also give the Finanzamt a SEPA-Lastschriftmandat, i.e. permission to take the income tax out of your bank account themselves, that way you can never miss a payment deadline.

How much will "Alternative 2" cost?

1. Cost of payroll accounting

In both above options (“very unlikely” and “nearly always”), your employer will have to hire me, sign a Vollmacht authorising me to act for them in front of the German institutions and pay my fee for the payroll accounting.

The law, §34 (2) StBVV, caps the fee for all this work at only 25€ a month, which doesn’t even remotely begin to cover all the work involved.

So this is the one case where I will only agree to do the work if your employer signs a contract with me (= Vergütungsvereinbarung, which is permitted by §4 StBVV), in which your employer agrees to pay me 50€ a month for these tasks.

2. Cost of your mandatory income tax return

Regarding the mandatory income tax return, to find out what my fee for the income tax return will be, please consult the Cost page.

You should negotiate with your employer that they cover the cost of your income tax return, by arguing that employees who have a German employer do not need to do a tax return in order to pay the income tax, but their employer simply deducts it at the source. So this additional cost is caused entirely by your employer being non-German.

However, even if you do manage to negotiate this, you should know that you will still end up paying something, to be exact: extra German income tax.
The problem is that the fact of your employer covering the cost of “your” income tax return is seen as a benefit in kind, which has to be taxed as income.
So your taxable income rises by my fee for that tax return.

Example:

  • my invoice for your tax return was 595€.
  • your personal income tax rate is 30%.

→ Your employer paying my invoice will end up costing you 178.50€ (= 30% x 595€) in extra income tax (plus extra social security contributions on 595€ if your salary wasn’t high enough to have already exceeded the social security contribution limits). 

But at least you wouldn’t be paying my 595€ fee for the income tax return, your employer would.
So look on the bright side: paying 178.50€ (plus maybe social security contributions) is preferable to paying 595€.