When employees are temporarily assigned to Germany, international companies often focus on one question: Will the employee spend more than 183 days in Germany?
However, there is another equally important question: Who is the economic employer?
Consider a typical situation:
An employee of a foreign group company is assigned to a German subsidiary for four months. The employment contract remains abroad, and the salary continues to be paid by the foreign employer.
However, the employee works under the direction of the German subsidiary, contributes to its local business activities, and the salary costs are borne by the German entity.
⚠️ The potential consequence?
Germany may have the right to tax the employee’s salary attributable to German working days from day one, even though the 183-day threshold has not been exceeded.
And there is more to consider:
🔹 Economic employer concept: The actual working arrangements, management responsibilities and allocation of salary costs are key factors.
🔹 Intercompany recharges: Even without an actual recharge, German wage tax obligations may arise if the salary costs should have been allocated to the German entity under arm’s-length conditions.
🔹 Payroll compliance: German wage tax withholding obligations may arise even when the salary is paid entirely abroad.
🔹 Employer liability: Failure to comply may expose the German company to significant tax liabilities and, in certain circumstances, its managing directors to personal liability.
💡 The key takeaway for international employers
Cross-border assignments require more than simply monitoring the number of days spent abroad.
Before an assignment begins, HR, payroll and tax teams should carefully assess who directs the employee’s activities, which entity benefits from the work, and where the employment costs should ultimately be allocated.
At United Tax Network, our international network of tax professionals helps businesses navigate these challenges and manage their cross-border employment obligations.
Because in international employment taxation, it’s not just about where employees work or who pays their salary — it’s also about who economically employs them.
