Federal Tax Court judgement: Cross-border commuter rules in German double taxation treaties

Earning income from employment as a "cross-border commuter"

As Germany has numerous borders with its European neighbouring states, there are, in both directions, many taxpayers who commute across the border daily to earn income from employment (section 19 of the Income Tax Act [Einkommensteuergesetz-EStG]) in the other state.

Under domestic law, in the "outbound case" – i.e. in the case of a person subject to resident taxation (section 1(1)) – foreign income from employment is captured as part of the taxpayers "worldwide income" (section 34d no. 5). Because such income qualifies as foreign income, an obligation on the part of the German treasury to credit foreign personal taxes arises under (the further requirements of) section 34c(1). However, comprehensive DTTs exist with Germany's neighbouring states (Federal Ministry of Finance [Bundesministerium der Finanzen-BMF] Circular of 7 Jan 2026, Federal Tax Gazette [Bundessteuerblatt-BStBl.] I 2026, p. 132), which in most cases leave the taxing right to that other state's treasury where the activity is carried out there on a lasting basis. In Germany, the exemption method is generally applied, although this is subject to a progression provision (section 32b(1) sentence 1 no. 3; Federal Ministry of Finance Circular of 12 Dec 2023, Federal Tax Gazette I 2023, p. 2179, para. 35). In addition, the subject-to-tax clauses within the domestic law under section 50d(7), (8), (9), (12) and (15) must be observed (Federal Ministry of Finance Circular of 12 Dec 2023, Federal Tax Gazette I 2023, p. 2179, para. 59 and following). Among the neighbouring states, only the DTT with Liechtenstein provides, in principle, for the credit method (article 23(1) letter b double letter ee of the DTT with Liechtenstein; Federal Ministry of Finance Circular of 12 Dec 2023, Federal Tax Gazette I 2023, p. 2179, para. 36).

In the "inbound case" (section 1(4) of the Income Tax Act; section 2 of the Foreign Transactions Tax Act [Außensteuergesetz-AStG]), by contrast, the taxing right is limited to domestic income under section 49(1) no. 4 of the Income Tax Act or section 2(1) sentence 1 of the Foreign Transactions Tax Act, and the tax is preferably levied by way of withholding (sections 38 and following of the Income Tax Act; section 50(2) sentence 1). Where the activity is carried out domestically on a lasting basis, the German DTTs generally grant Germany, as the "source state", an unlimited right to tax.

As a measure for "cross-border commuters", domestic law provides in particular for the right to apply for resident taxation under section 1(3): where a taxpayer subject to non-resident tax liability generates income that is substantially subject to German income tax, that person may thereby avoid the disadvantages of non-resident taxation – such as the lack of any possibility of joint filing (section 26; section 1a) (Federal Ministry of Finance Circular of 12 Dec 2023, Federal Tax Gazette I 2023, p. 2179, para. 47). This option is, however, linked to a progression provision in respect of the remaining "worldwide income" (section 32b(1) sentence 1 no. 5; Federal Ministry of Finance Circular of 12 Dec 2023, Federal Tax Gazette I 2023, p. 2179, para. 54), which may not be excessively large, as otherwise the limits under section 1(3) sentence 2 would not be complied with.

Cross-border commuter rules in German DTTs

The German DTTs follow, with regard to the question of "employment" (article 15 of the 2025 OECD Model Convention/article 14 of the German Model Treaty 2026), essentially the place-of-work principle. Under article 15(1) sentence 1 of the OECD Model Convention, remuneration from employment may be taxed exclusively in the employee's state of residence, unless the activity is carried out in the other state (the state of activity). Where the employment is carried out in the other state, that state is, in principle, also entitled to a taxing right in respect of the remuneration received for the activity carried out abroad (article 15(1) sentence 2 of the OECD Model Convention).

In determining the state of activity, what matters solely is the place where the employment is carried out (the "place-of-activity principle"). For determining the place where the employment is carried out, the place of work is the relevant factor. This is the place where the employee actually stays in order to carry out his or her activity; what is decisive in this regard is his or her physical presence in the state of activity (Federal Tax Court judgement of 28 Jun 2023, file ref. I R 43/20, Federal Tax Gazette II 2024, p. 861, para. 16, with further references).

The German cross-border commuter rules, which exist with France, Austria and Switzerland, constitute a departure from the OECD Model Convention for cross-border employees ("leges speciales"; Federal Ministry of Finance Circular of 12 Dec 2023, Federal Tax Gazette I 2023, p. 2179, para. 29). The Federal Tax Court sees the reason for this special rule in the fact that "cross-border commuters have the centre of their lives at their place of residence and, in the state in which they are employed, merely pursue their employment without having any closer ties to that state" (Federal Tax Court judgement of 1 Mar 1963, file ref. VI 119/61 U, Federal Tax Gazette III 1963, p. 212). The concept of a cross-border commuter does not require that, “on a sensible construction, without exception, a daily crossing of the border in both directions” occur, but it does require “a distinction from employees who commute across the border only occasionally from their home to a workplace abroad”. According to the Federal Tax Court's interpretation, "it is not to be overlooked that a return home on a daily basis is, in principle, a characteristic inherent in the concept of the 'cross-border commuter'" (Federal Tax Court judgment of 16 March 1994, file ref. I B 186/93, Federal Tax Gazette II 1994, p. 696).

The cross-border commuter rule under the DTT with Switzerland

Under the 1971 DTT between Germany and Switzerland, article 15a(1) provides that, notwithstanding the distributive article on "employment" (article 15; on the priority of article 15a e.g. Federal Tax Court judgement of 30 Sep 2020, file ref. I R 37/17, para. 17), salaries, wages and similar remuneration received by a cross-border commuter from employment may be taxed in the treaty state in which that person is resident. In compensation, the treaty state in which the employment is carried out may levy a tax on such remuneration by way of withholding. This tax may not exceed 4.5 per cent of the gross amount of the remuneration where residence is proven by an official certificate from the competent tax authority of the treaty state in which the taxpayer is resident. In this respect, instead of the credit otherwise carried out in the tax assessment procedure (section 34c of the Income Tax Act), a credit is carried out in the tax collection procedure (section 36(2); article 15a(3); Federal Ministry of Finance Circular of 12 Dec 2023, Federal Tax Gazette I 2023, p. 2179, para. 39; Federal Ministry of Finance Circular of 8 Feb 2018, Federal Tax Gazette I 2018, p. 270).

For the purposes of article 15a(1), a "cross-border commuter" is any person resident in one treaty state who has his or her place of work in the other treaty state and regularly returns from there to his or her place of residence. Where this person does not return to his or her place of residence after each working day, the status of cross-border commuter is lost only where, in the case of employment throughout the entire calendar year, the person fails to return to his or her place of residence on more than 60 working days on account of the carrying out of the employment.

The Federal Tax Court has now again decided on the exceeding of the 60-day rule: the plaintiff was employed in Switzerland only on a part-time (90%) basis, so that the number of 60 harmless days under article 15a(2) was reduced proportionately to 54. The question of whether a person fails to return to his or her place of residence on more than 60/54 working days precisely "on account of the carrying out of the employment" is to be assessed by the Lower tier tax court [Finanzgericht-FG] as the court where facts are gathered: non-return is occasioned by the carrying out of the employment where the return was not possible or not reasonable for occupational reasons (e.g. Federal Tax Court judgement of 15 Sep 2004, file ref. I R 67/03, Federal Tax Gazette II 2010, p. 155, under II.4.). Since, according to the findings of the Lower tier tax court, the plaintiff had working hours of around ten hours on the days of non-return and began work again as early as 06:00 on the following days, and would have needed a total travel time of around three hours to reach his place of residence in Germany, a return was not reasonable for him. Article 15 therefore continued to apply, resulting in a taxation outcome that was considerably more favourable for the plaintiff.