Cross-border employment; tax consequences of unexpectedly working from home: agreement between the Netherlands and Germany
As a consequence of the COVID-19 measures a lot of international employees are working (more) from their homes in their country of residence. This may have an effect on the taxation of their employment income. Based on the main rules of tax treaties, the following applies.
Employment income of employees working cross-border that is allocable to the days worked in the country where the employment is performed, is taxable in that country, if the employee:
- has been seconded to a local economic employer, or
- is working for a local permanent establishment of his employer, or
- stays on more than in the aggregate 183 days per twelve months in the other country where he performs his employment activities.
If, under normal circumstances the employee had worked in the other country, his employment income for these working days might have been taxable in the other country. If, however, the current travel ban leads to working at home in the country of residence, the question arises whether the income becomes taxable in the country of residence.
Agreement between the Netherlands and Germany
On 6 April, last, the Netherlands and Germany agreed to a different tax allocation of employment income for the period 11 March up to and including 30 April, which period may be extended if so required. In short, the following rule applies.
- For days on which the employee, exclusively due to the COVID-19 measures, works at home, instead of in the country where he would normally work, the income for those working days is taxable in the other country if that would also have been the case under normal circumstances. The employee must take this position in his personal income tax returns in both countries. This special rule only applies if the other country actually levies tax. Moreover, the employee must be able to provide a statement from his employer.
- For working days on which the employee is forced to stay at home, is being paid regularly, but does not work, the Dutch and German tax authorities have confirmed that this income shall be allocated to both countries according to the ratio of days worked in the work-state / total working days as when the employee would have continued working in his normal pattern in both states. This interpretation of the tax treaty applies irrespective of the COVID-19 period and is not limited in time.
It may be that similar agreements will be made by the Netherlands with other countries. We advise you to monitor developments and we are happy to assist you to determine whether the withholding of wage tax should be changed for the employees concerned.