Since the amendment of the German wage tax guidelines in 2023 and therefore since 1 January 2023, the question arises as to how wage tax has to be calculated for employees with income which is partly taxable and partly exempt from wage tax in Germany.
As of 1 January 2023, it is required that the wage tax on current wages is not to be determined according to the monthly tax table but according to the daily tax table, if the employment relationship existed throughout the month and the employee receives wages in a month partly taxable in Germany and partly exempt from wage tax.
Affected employees
This includes cases of in Germany unrestricted taxable employees who, in addition to their German wages, also earn in other countries tax-free wages in a month according to a double taxation agreement (DTA) or the EU Foreign Activity Decree. However, the application of the daily wage tax table only has the effect of a potential temporary wage tax overpayment since an adjustment is made via the personal income tax assessment (Note: Mandatory assessment due to so-called progression income).
Material impact arises from the application of the daily wage tax table for employees subject to limited tax liability in Germany, i. e., generally those who earn wages subject to limited tax liability through their activity in Germany, whereupon the tax withholding by the German employer is considered final (Note: However, there is the possibility of an elective assessment according to German Income Tax Code).
Calculation of the relevant days for the application of the daily rate table
The German Tax Authorities commented on the calculation of wage tax based on the daily rate table in an email from 12 October 2023 to the German Chamber of Commerce and Industry, stating that two approaches are possible. These differ in whether, in addition to the days worked in Germany in a month, the non-working days are considered only in the ratio of the working days in Germany to the total working days (option 1) or specifically according to the non-working days spent in Germany (option 2).
Depending on whether an employee whose wages are to be taxed according to the daily rate table spends his non-working days predominantly in Germany or in another country, one of the options may be more advantageous.
Note: In practice, employers often face the problem of not knowing where their employees spend their non-working days. In a submission dated 18 January 2024, eight trade associations in Germany propose a simplification regulation as an unbureaucratic solution.
With a letter dated 26 February 2024, addressed to a representative of the Federal Association of German Banks, the German Tax Authorities approve such a simplification regulation for determining the total working days:
- The total working days in a month can be set at a flat rate of 20 working days. It is therefore not necessary to explicitly determine the actual total working days in a month.
- Since the monthly tax days always amount to 30, a factor of 1.5 (30 tax days for 20 total working days) can be used in calculating the tax days relevant to wage tax.
- Example: If an employee works for 6 days in Germany in a month and provides his work on the remaining workdays in a DTA foreign country, 9 tax days should be considered for determining the wage tax. If the employee earns a gross wage of 1,500 Euros for the working days in Germany, the daily wage tax table must be applied to a daily wage of 166.66 Euros (1,500 Euros/9 days). It is not necessary to determine how many non-working days the month contains and where the employee spends these days.
The German Tax Authorities also state in the letter from 26 February 2024 that it is not objectionable to continue to apply the guideline regulation before 2023 for the year 2023. According to reports, German financial offices are now being instructed to apply the daily rate table only from 2024. Given the announcement of the letter at a time when in Germany annual wage tax certificates have usually already been submitted, there are considerable procedural hurdles to overcome if a wage tax refund is to be obtained retrospectively.
Performing a wage tax annual adjustment
Starting from the tax assessment period 2020, in Germany a wage tax annual adjustment can or must also be carried out for employees subject to limited tax liability who are employed continuously by the same employer throughout an entire calendar year.
However, the wage tax annual adjustment is excluded if, in addition to the income taxable in Germany, employment earnings are also earned that are exempted in Germany according to a DTA or the EU Foreign Activity Decree.
The German Tax Authorities confirm the statement of the German trade associations that therefore, the wage tax annual adjustment is to be carried out for limited tax liability employees who are employed throughout the year. The wage tax is then determined based on the annual wage, which regularly results in a tax refund and ultimately renders the application of the daily wage tax table ineffective. Under specific conditions the wage tax annual adjustment can be excluded. A clarification by the German Tax Authorities in which cases the exclusion criterion is fulfilled is still outstanding.
Conclusion
The German Tax Authorities willingness to further clarify the application of the daily wage tax table for employees who only earn partially taxable wages in Germany in a month is generally to be welcomed. Unfortunately, not all application questions have yet been clarified.
It is becoming apparent that the German Tax Authorities, at least from 2024, insist on a uniform implementation of the daily rate table for employees subject to unlimited and limited tax liability in Germany. Furthermore, the German Tax Authorities indicate that a new version of the letter dated 14 March 2017 on the determination of tax-free and taxable wages according to double taxation agreements and the EU Foreign Activity Decree in the wage tax withholding procedure is planned. Additionally, the provision for the wage tax annual adjustment according to the German Income Tax Act is to be repealed for employees subject to limited tax liability with the Annual Tax Act 2024. A corresponding draft proposal dated 5 June 2023 is already available.
Employers, who have already applied the daily rate table in 2023, should examine whether a procedural change to the wage tax registrations is still possible so that the monthly table can be applied.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.