When assessing the tax position, both the domestic German tax law and the tax law of the foreign state, as well as the agreements between the two states (double taxation agreements), must be taken into account. As a general rule, employment income is taxed in the country where the work is carried out. An employee who works exclusively in the Netherlands must therefore pay tax on their employment income only in the Netherlands. However, there are numerous exceptions to this principle.
Case 1
The employee has previously lived in Germany and worked in Germany. From the turn of the year they work abroad, e.g. in the Netherlands, and for this reason simultaneously moves their residence to the Netherlands. No other income is earned. There is no longer any residence in Germany. Since the employee will have neither a residence in Germany nor German-sourced income in future, they are no longer subject to income tax in Germany. They are also not required to submit an income tax return in Germany. The Dutch income is taxed in the Netherlands.
Case 2
The employee changes both residence and place of work as in Case 1, but the change is made during the year, for example on 1 July of a year. In the year of the change the employee must submit two tax returns, one in Germany and one in the Netherlands. Germany: the German employment income is subject to German income tax. The Dutch employment income must be stated in the tax return. It is tax-free but is subject to the so-called progression clause (Progressionsvorbehalt). This means that the rate of income tax applied to the German employment income is higher than it would normally be. Netherlands: the Dutch employment income is subject to Dutch income tax. The German employment income is tax-free in the Netherlands.
Case 3
The employee changes both residence and place of work as in Case 1. In addition to the employment income, they permanently let a property in Germany. The German rental income is subject to income tax only in Germany. There is limited tax liability. An income tax return must be submitted in Germany annually.
Case 4
The employee works in the Netherlands but retains their German residence. Their wife and children continue to live there. The Dutch employment income is taxed only in the Netherlands. All other income (e.g. the wife's German employment income, interest, German rental income, etc.) is taxed only in Germany. There is unlimited income tax liability in Germany. The Dutch employment income is subject to the progression clause in Germany.
Case 5
The employee's main place of life (Lebensmittelpunkt) is in Germany. As they work for an international group, they carry out their work in parallel: in the Netherlands at the employer's premises (120 days), in Germany (80 days), in third countries (20 days). Total earnings are 110,000 EUR per year. There is unlimited income tax liability in Germany. The employment income is apportioned on the basis of working days: In the Netherlands: 120 days / 220 days x 110,000 EUR = 60,000 EUR. This amount is taxed only in the Netherlands (with progression clause in Germany). In Germany: 80 days / 220 days x 110,000 EUR = 40,000 EUR. This amount is taxed only in Germany. In third countries: 20 days / 220 days x 110,000 EUR = 10,000 EUR. This amount is taxed only in Germany. Other income is taxed in Germany.
Case 6
The employee lives in Germany and works for a German employer. The employer sends them abroad for three months to implement new software at a client's premises in the USA. The employee stays in a hotel there. The employment income is subject to income tax only in Germany, even though the work is carried out abroad. This applies as long as the employee does not stay in the USA for more than 183 days.
Case 7
The employee lives in Germany and their main place of life is in Germany. They worked in Iran for almost the entire year. They have no documentation as to whether the Iranian employment income was taxed in Iran. In principle this employment income would be tax-free in Germany. However, since it cannot be proven that the employment income was already taxed in Iran, the employment income is subject to German income tax in full.
The above cases are so-called "outbound" cases, meaning the employee "leaves" Germany for their work. The so-called "inbound" cases are assessed in exactly the mirror-image fashion (e.g. a Dutch employee working in Germany).
There are numerous special rules and exceptions to the principles mentioned, e.g.: for frontier workers in certain states, for board members and managing directors, for certain elements of remuneration (e.g. directors' fees, severance payments, pension entitlements, etc.), for states with which no double taxation agreement exists.
The double taxation agreements, which govern taxing rights between two states, are broadly similar in their basic structure but differ from one another in detail.
If your situation is more complex, we therefore recommend a consultation. We will explain what you need to bear in mind in order to minimise the tax burden arising from working abroad.