Payroll tax for employees with foreign working days increases significantly

Quietly and unnoticed by the general public, the tax authorities have added an important amendment for payroll tax deduction as of January 1, 2023, which is well hidden in the Income Tax Guidelines. For employees with foreign working some, such amendment will significantly aggravate payroll tax deduction.

Previously, these foreign working days counted as German tax days when calculating the employee’s monthly payroll tax deduction. This will no longer apply as of January 1, 2023. Employees’ foreign working days will now be excluded from the tax days for German payroll tax deductions, provided the salary for these foreign working days is not subject to payroll tax in Germany (Income Tax Guideline 39b Sec. 5 sentence 2 LStR 2023). 

Employment in Germany and abroad: Where is the employee subject to payroll tax?

Example: An employee with no management function has his center of vital interest in Austria and a German employer. In February, such employee works 70 % in Austria and 30 % in Germany. Due to the applicable provisions pursuant to the Germany-Austrian Tax Treaty, his salary for Austrian working days is not subject to payroll tax in Germany. 

For his German February payroll, the employer now must now calculate with 9 tax days instead of 30 tax days as before. Due to such amendment, payroll tax on his salary received for German working days which is subject to tax in Germany will significantly increase, his net salary will significantly decrease. 

Amendment applies to employees of any kind

Such amendment in relation to foreign working days applies to all employees in Germany, irrespective of whether they are subject to unlimited or limited tax liability. Taxpayers subject to unlimited tax liability, however, can generally reclaim such tax disadvantage in their income tax return. For taxpayers subject to limited tax liability this is only possible if they are willing or entitled to file an income tax return. 

So far, such amendment can only be seen in the 2023 Income Tax Guidelines and therefore only reflects the tax authorities’ opinion. It remains to be seen if and how the legislation and case law will address such amendment. 

The change does not apply to the social insurance days. In this regard, the calculation on the basis of 30 social insurance days per month generally continues to apply, unless there is an exemption, for example on the basis of an A1 certificate in favor of another country.