Wage taxation under the double tax treaties (DTT)

Treatment of wages in a cross-border context

The taxation of wages in a cross-border context begins - as always with cross-border income tax issues - with the examination of national law. The “inbound case” deals with questions of the non-resident income tax liability (Sect. 1(4) of the Income Tax Act; Sect. 2 of the German Foreign Transactions Tax Act (“Außensteuergesetz”)) and the “domestic income” that is essentially relevant in this context (Sect. 49(1) no. 4 of the Income Tax Act). In the “outbound case,” the focus is on the “foreign income” under Sect. 34d no. 5 of the Income Tax Act and the related question of a possible entitlement to credit foreign taxes (Sect. 34c(1) of the Income Tax Act). These issues alone are so multifaceted and complex that the Circular of the Federal Ministry of Finance dated December 12, 2023 (Federal Tax Gazette I 2023, p. 2179; last amended by the Circular of the Federal Ministry of Finance dated December 19, 2025, Federal Tax Gazette I 2026, p. 20) dedicates margin nos. 42 through 98 to them.

Accordingly, however, the German right of taxation may be limited or excluded by double tax treaties (Sect. 2(1) of the General Tax Code). Double tax treaties “are generally not intended to establish tax obligations, but solely to avoid existing double taxation” (Judgement of the Federal Tax Court dated November 4, 2021, file number VI R 22/19, Federal Tax Gazette II 2022, p. 562, margin no. 41). The Circular of the Federal Ministry of Finance dated December 12, 2023 (Federal Tax Gazette I 2023, p. 2179) devotes considerable space to them (margin no. 99 et seq.). In particular, the “detailed issues”, such as those surrounding the “183-day rule” (Art. 15(2) lit. a of the OECD Model Convention 2025), are contentious and vary from DTT to DTT (margin no. 105 et seqq.). In addition, questions arise, for example, if German tax law is influenced by not just one, but (at least) two DTTs in “triangular cases” (most recently Judgement of the General Tax Court dated June 1, 2022, file number I R 30/18, Federal Tax Gazette II 2023, p. 29).

However, any restriction on Germany’s right to tax that might result from the application of the DTT is then superseded by a “third” layer regarding potential treaty overrides (as well as the progression provision, Sect. 32b(1) sent. 1 no. 3 of the Income Tax Act). In the case of income from employment, this usually begins with Sect. 50d(8) of the Income Tax Act (Circular of the Federal Ministry of Finance dated December 12, 2023, margin no. 59 et seqq.) - the taxpayer must prove that the state entitled to tax under the DTT 

• has waived this right of tax or 
• the taxes assessed on the income in that state have been paid. 

In addition, Sect. 50d(9) of the Income Tax Act must be examined (Circular of the Federal Ministry of Finance dated December 12, 2023, margin no. 83 et seqq.): Insofar as the other state applies the provisions of the DTT in such a way that the income in that state is to be exempt from taxation or can only be taxed at a tax rate limited by the treaty, the exemption is also not granted (Sect. 50d(9) sent. 1 no. 1 of the Income Tax Act); in such cases, the taxpayer is instead subject to the credit method (Sect. 34c(6) of the Income Tax Act; Circular of the Federal Ministry of Finance dated December 12, 2023, margin no. 91).

Complexity of Sect. 50d(9) of the Income Tax Act regarding wages in a cross-border context

The German conjunction “soweit” (“to the extent that”) in Sect. 50d(9) sent. 1 of the Income Tax Act is a “new invention” by the legislature, which replaces a “qualitative-conditional prerequisite of taxation” with “if” by “one of a quantitative nature” (Judgement of the Federal Tax Court dated August 27, 1997, file number I R 127/95, Federal Tax Gazette II 1998, p. 58). In the legislature’s view, the earlier “if” had led to “untenable results” (as in the “Spain ruling,” Judgement of the Federal Tax Court dated January 21, 2016, file number I R 49/14, margin no. 29).

Since then (Anti-BEPS (“Anti- Base Erosion and Profit Shifting”) Act of December 20, 2016), “to the extent that” has been the conjunction used in Sect. 50d(9) sent. 1 of the Income Tax Act. In addition, sentence 4 of Sect. 50d(9) of the Income Tax Act requires an “atomization” of the income (Circular of the Federal Ministry of Finance dated December 12, 2023, margin no. 88): Even “parts of income” must be examined individually to determine their eligibility for exemption. In case of the Dutch “30% rule” for the flat-rate assessment of additional costs of a foreign employee, there is no longer any reason for “atomization” - in the opinion of the Federal Tax Court (Judgment of the Federal Tax Court dated April 10, 2025, file number VI R 29/22, Federal Tax Gazette II 2025, p. 594), there is no “partial non-taxation” anyway.

The situation may be different, for example, in the case of “participation bonuses” in Luxembourg, which can lead to a partial fallback (stay of execution proceedings (“AdV-Beschluss”) of the Rhineland-Palatinate Fiscal Court dated October 10, 2025, file number 1 V 1398/25). However, in the appeal proceedings against the decision of the Neustadt Fiscal Court, the Federal Tax Court (decision dated March 4, 2026, file number VI B 44/25 (stay of execution proceedings), identified a substantive legal error in the administrative decision, which prevented a decision on the merits (in any event subject only to the lower standard of review of a decision regarding stay of execution proceedings (“AdV-Beschluss”)) regarding the question of the atomization of income under Sect. 50d(9) sent. 4 of the Income Tax Act. The prohibition against aggravation under the Tax Court Code (“Finanzgerichtsordnung”) does not protect the taxpayer in general from such disappointments (Sect. 96(1) sent. 2 of the Tax Court Code). Rather, “the subject matter of the dispute is not the individual tax attribute, but the legality of the respective tax assessment notice”. Therefore, “there is no impermissible aggravation if the court, within the scope of the claim, ‘offsets’ individual points of dispute that are to be assessed differently against one another” (Judgement of the Federal Tax Court dated December 1, 2010, file number XI R 46/08, margin no. 52).

No substantive decision on “atomization” under Sect. 50d(9) of the Income Tax Act

According to these principles, the Federal Tax Court did not have to address the practically relevant question of “atomization” under sentence 4 of Sect. 50d(9) of the Income Tax Act. In particular, the term “parts of income” - which the legislature had introduced in response to the Federal Tax Court case law mentioned above - would have been significant for practitioners.  Even though the Federal Tax Court has “serious doubts” (within the meaning of Sect. 69(2) sent. 2 of the Tax Court Code) on this point (margin no. 13), no decision on the merits is rendered, as the court offsets the potential effects (a reduction of the tax base by approximately EUR 8,000) with other substantive legal errors in favour of the complainant (amounting to more than EUR 12,000).

These errors relate in particular to the question of how many days the claimant worked in Luxembourg during the disputed year 2023, as this gives rise to a competing right of taxation for Luxembourg (and the associated exemption obligation in Germany; Art. 14(1) sent. 1 and 2 DTT LUX 2012). According to established case law (margin no. 18), the basis for calculating income not subject to domestic taxation is the number of contractually agreed working days in the calendar year, minus vacation days and other non-working days (non-working Saturdays, Sundays and statutory holidays). Sick days, on the other hand, are not to be excluded from the income allocation, as the allocation does not depend on the days on which the taxpayer actually worked, but rather on the contractually agreed (regular) working days (Judgement of the Federal Tax Court dated August 1, 2024, file number VI R 23/22, margin no. 41).

In the meantime, the situation has become even more “confusing” - Germany and Luxembourg have negotiated a Paragraph 1a in Article 14 with a “de minimis threshold” (“Bagatellgrenze”) of “fewer than 35 working days”: However, the provision only became applicable after the year in question.