Cross-border working

A new employee residing in Austria is to be employed by a group based in Germany but will work as head of operations at an intermediate holding company in the Netherlands and travel between locations on 150 to 200 days a year. What are the tax consequences for the employee and the group? What has to be considered in terms of social security and labor law?

An employee of a French-German group in France is employed by one of the group’s companies resident in Germany. She commutes between her French residence and her German place of work, but regularly works from home. Increasingly, though, she also works on-site at the company in France. In addition, she is soon to manage a project for a client in Switzerland for several weeks. Will she meet the requirements of the cross-border commuter provisions in the double taxation treaty with France?

Cross-border working is associated with a myriad of issues. These can lead to incredibly complex tax issues, requiring a careful consideration of both employer and employee. The employer may have to take into account wage taxes. If an employee’s activity creates a permanent establishment abroad, wage tax obligations may apply and part of the company’s profit may be subject to taxation for the country in question. Double taxation can therefore occur, though the period is likely to be temporary. Transfer pricing issues can also play a role. For her part, the employee may want to determine her total tax liability in the countries of activity beforehand. She may also want to know her social security contributions. If national preferential tax provisions for expatriates apply, switch-over or subject-to-tax clauses may have to be considered, which do not make forecasting the total tax amount any easier.

Cross-border commuter provisions are special provisions in double taxation treaties that result in the cross-border commuter’s employment income being taxed under certain conditions in his state of residence and not – as would normally be the case – in the state where he works. Currently, only the double taxation treaties that Germany has concluded with France, Austria, and Switzerland include such special provisions. The cross-border commuter provision in the double taxation treaty with Switzerland is very unusual. But the French-German cross-border commuter provision also has its peculiarities, such its regulations concerning the taxation of a cross-border commuter’s severance pay.

Together with other professionals at home and abroad, I analyze cross-border issues with regard to tax, social security, and labor law. Ideally, the analysis takes places before the cross-border activity begins, but a comprehensive review at a later point can also be useful.