The tax authorities have released a draft circular on the taxation of internationally mobile employees. The final version will be published officially within the next few weeks. The circular brings a number of decrees from the past few years together in a single document, and so serves as a good overview of the special features of expatriate taxation.
Two items of substantive change are worthy of note. For the first time, the tax authorities set out in detail their view on the tax liability of a foreign employee working for less than 183 days in Germany. They see his remuneration as taxable if his relationship with a German company amounts in substance to an employment (so-called "economic employer"). This is particularly relevant to multinational groups with short-term assignments between affiliated companies. The concept of economic employer will also be applicable to employees on assignment abroad and will therefore often be crucial in determining whether the German employer is entitled to stop accounting for tax withholdings. The second major novelty is to be found in the taxation of employee stock options. Until now, the approach has been to tax the benefit on exercise of the option and – where residence has changed in the meantime – to apportion it according to the length of time spent in Germany between the grant and exercise dates. The German tax authorities now want to follow the OECD's proposal to allocate the gain on the basis of the period between grant and first possible exercise of the option.
Both expatriate programme and tax managers will find a review of their international assignment policies and practices in the light of the new circular a rewarding and constructive exercise.
Oliver Schmidt (oliver.schmidt@de.pwc.com), Hamburg
