Federal Ministry of Finance Circular DTA income: changes since 2025

Assessment of the economic employer and the business interest

Paragraph 164 on the assessment of the economic employer and the business interest now refers to the indicative effect of the employer’s confirmation of the costs recharged to the host company in the source state according to the arm’s length principle. This is intended to eliminate the comprehensive examination of the interests involved under paragraphs 160 to 163 to assess the employee’s income tax. It therefore acts as a simplification for the tax office responsible for the taxpayer’s residence when processing income tax assessment.

According to paragraph 167, the employer in Germany must confirm to the employee the percentage of the remuneration components to be treated as employment income under German tax law and the other wage costs (including wage administration costs) that have been recharged under the arm’s length principle and thus borne by the host company. The remuneration resulting from the total costs mentioned, which is to be treated as employment income under German law, must be shown separately.

This confirmation certificate has indicative effect. It is a rebuttable presumption that the allocation of costs as confirmed by the employer is in harmony with the arm’s length principle. It can be assumed that the work is performed exclusively in the interest of the host company if all wage, ancillary wage and wage administration costs associated with the posting are confirmed as recharged to the host company. If these costs remain wholly or partly with the posting company, the posting is to that extent also carried out in the interest of the posting company.

Confirmation is particularly necessary in cases where the existence of an economic employer is affirmed in order to assign the right of taxation. The new form entitled “Arbeitgeberbescheinigung über die Kostentragung zur Vorlage beim Wohnsitzfinanzamt“ (“Employer’s certificate of cost coverage for submission to the tax office of residence”) provided by the tax authorities is to be used as proof of the percentage of the costs of the cross-border posting recharged under the arm’s length principle. It can be downloaded from the Federal Ministry of Finance website (in German only).

Determination of taxable and tax-free employment income for periods of revocable and irrevocable garden leave

The newly added number 5.7, following section 50d(15) of the German Income Tax Act (Einkommensteuergesetz – EStG) lays down that continued employment income paid for periods of revocable or irrevocable leave of absence related to the termination of employment (garden leave) that is paid for performing work in the state in which the work would have been performed without the garden leave is considered as remuneration for the purposes of applying a DTA.

For the purposes of apportioning employment income, working days are counted as having been worked in that state. However, the provision does not count an employee as being present in that state; it therefore has no effect on the 183-day period.

It also clarifies that periods of irrevocable garden leave are not normally included in the vesting period for period-based remuneration that is paid for reasons other than continuing regular wage payments during garden leave since the work can no longer be performed; therefore, longer vesting periods for period-based remuneration (e.g. stock options, severance payments) may need to be curtailed.

The provision in section 50d(9) sentence 1 no. 1 EStG (the reversion clause) must also be observed here. If the country in which the work would have been performed without the leave does not actually tax the employment income, the right of taxation reverts to Germany.

The revised paragraph 361 stipulates that in the case of merely remaining available without actually performing any work, the work is considered as performed where the employee is actually resident while he or she remains available. For periods of revocable garden leave, the work is deemed performed as in number 5.7. However, the references to periods of irrevocable garden leave previously contained in paragraph 362 have been discontinued.

Discontinuance of the reversion of the right of taxation when the 30 per cent ruling in the Netherlands is applied

In addition to special provisions on the work of crew on ships and aircraft related to the DTA with Liberia in paragraphs 404-06, paragraph 421 in the amended Circular has also been rescinded and not replaced.

The former paragraph 421 explained the application of the reversion clause of section 50d(9) EStG to the portion of employment income that is not taxed in the Netherlands based on applying the 30 per cent ruling. The discontinuance of this means that the Circular has been amended to take account of the judgement handed down by the Federal Fiscal Court (BFH) on 10 April 2025 (file ref. VI R 29/22, BStBl. 2025 II p. 594) on the inadmissibility of the reversion clause when applying the 30 per cent ruling.

Effective dates

The Federal Ministry of Finance Circular is to come into force as a whole from 1 January 2025. This does not apply to the rules for determining taxable and tax-exempt employment income for periods of revocable and irrevocable garden leave. These are to apply from 1 January 2024.

The amended regulations on the work of crew on ships and aircraft related to the DTA with Liberia are to apply from 1 January 2026.

When the 30 per cent ruling applies, the rescinding of the reversion clause applies in all open cases. At the taxpayer’s request, the above provisions may be applied in all open cases, provided that this does not conflict with statutory provisions.

Assessment

Confirmation certification of cost recharging

The employer confirmation to be submitted starting from the tax year 2025 in cases where the host company in the state in which the work was performed is to be regarded as the economic employer will cause companies considerable extra work. HR and tax departments must review and compare the recharged costs on a case-by-case basis and also compare the salary components with the payroll statement and income tax statement. Discrepancies will inevitably occur, especially when recording costs in the payroll statement that are to be recorded as non-monetary benefits.

Furthermore, the contents of the confirmation that there is an economic employer contradict the rule in section 38(1) sentence 2 EStG, according to which the economic employer is also the entity that would have had to bear the costs, since it only focuses on the actual recharging of costs. According to the guidance on the employer confirmation certificate, the recharging of the confirmed costs is final, and the costs may not be charged back to the submitting entity in other ways. However, where functions are centralised, e.g. managerial accounting, purchasing, etc., costs are usually bundled and then charged as a service to all the entities using those functions by way of a distribution formula. In light of this, excluding charging the submitting company with costs does not seem fair, especially as this concerns a different matter not related to the employee posting. It remains to be seen to what extent these confirmations will also be drawn upon in future for payroll audits. 

Taxation of employment income during revocable and irrevocable garden leave

Regarding the taxation of employment income during periods of revocable and irrevocable garden leave, the adjustment was made in line with the rule in section 50d(15) EStG introduced by the 2024 Annual Tax Act, which has in turn adopted the view of the OECD. Employers should therefore check whether their approach up till now is in line with the current official opinion, particularly on determining the vesting period for period-based remuneration that is not on-going employment income for the garden leave period.

30 percent ruling

The discontinuance of the previous rule relating to the 30 per cent ruling allows the tax authorities to implement the Federal Fiscal Court judgement. By treating the 30 per cent as an expense allowance rather than a tax exemption, the remuneration is no longer to be added to taxable income in Germany but is only subject to the progression rale scale (Progressionsvorbehalt) for taxpayers with unlimited tax liability. This creates legal certainty for cross-border companies and the employees affected by the rule.