Netherlands and Germany agree on cross-border worker taxation in light of COVID-19

By Jian Cheng Ku, Rhys Bane, & Mehdi el Manouzi, DLA Piper Nederland N.V., Amsterdam

 The Netherlands and German governments have entered into a competent authority agreement addressing the application and interpretation of Article 14 (income from employment) of the Netherlands-Germany tax treaty in light of recent measures to curb COVID-19.

The novel coronavirus pandemic has the world in its grip. Governments are enforcing lockdowns, travel restrictions, banning public gatherings, and taking other measures to control further spread of the virus.

The restrictions may make it impossible for cross-border workers to work in their country of employment, which, in turn, could lead to adverse tax consequences in cross-border situations.

Taxation could be affected not only under domestic law but also under applicable tax treaties due to how taxing rights are divided. In this respect, the OECD has released guidance addressing how governments should apply standard tax treaty provisions. Please see our earlier MNE Tax article on the OECD’s guidance.

Netherlands-Germany agreement

The Netherlands and Germany, which have a lot of cross-border activity, have now mutually agreed to resolve tax treaty issues for cross-border workers arising from the measures taken against the spread of COVID-19.

The competent authority agreement, published by the Netherlands government on 10 April, deals with the application and interpretation of Article 14 (income from employment) of the Netherlands-Germany tax treaty. 

More specifically, it addresses how to handle the days that a cross-border worker works from home due to the COVID-19 measures or is idle at home while receiving a salary or German social security payments.

The new measures apply from March 11 until April 30 and will be extended automatically for one month periods until terminated by either of the parties.

Cross‑border workers

 Tax treaties generally allocate the right to tax income from cross‑border employment between the employee’s state of residence and the state in which the employee exercises his/her employment.

The OECD Model Tax Convention on Income and on Capital of 2017, for example, allocates the right to tax income derived from employment to the individual’s state of residence, unless the employment is (physically) exercised in the other state.

However, the state in which the employment is (physically) exercised, is only allowed to exercise its right to tax if the employee is present for more than 183 days (within a period of 12 months), the employer is a resident of the source state, or the employer has a permanent establishment in the source state that bears the remuneration.

Under the current circumstances, cross‑border workers may be unable to physically perform their duties in their country of employment, which may lead to a different tax treatment (status) under the applicable tax treaty due to not meeting the number of days that a worker may work outside the country of employment.

Days spent working at home

The new competent authority agreement stipulates that, for purposes of Article 14 (income from employment) of the Netherlands-Germany tax treaty, days of work for which wages are received and during which the employment was exercised at home solely due to the measures taken by the German or Dutch government may be considered as days spent working in the treaty state where the employee would have exercised his/her employment.

The new competent authority agreement stipulates that, for purposes of Article 14 (income from employment) of the Netherlands-Germany tax treaty, days of work for which wages are received and during which the employment was exercised at home solely due to the measures taken by the German or Dutch government may be considered as days spent working in the treaty state where the employee would have exercised his/her employment.

Eligibility for this fiction requires a consistent usage of this fiction in both treaty states. Furthermore, taxpayers must keep appropriate records, including the written confirmation of the employer stating the days spent working at home were solely due to the COVID-19-related measures.

Finally, this fiction only applies if the respective wages for the days working at home are actually taxed by the tax treaty state in which the cross-border worker would have exercised the employment.

Days spent idle at home while receiving salary

 The competent authority agreement sets out that Article 14 of the tax treaty should be applied in such a way that situations where a cross-border worker spends days that would normally be working days idle at home (i.e., not working), the employee’s former work pattern (i.e., the ratio of days worked in the country of employment/total working days) is applied as if the employee continued working as before. 

The foregoing, however, applies only if an employee spends one or more days that would normally be working days idle at home (i.e., not working) and the employee continues to receive a salary from the employer.

The competent authority agreement states that this is a clarification of the views held by both treaty states on the application of Article 14 (income from employment).

Exemption of German social security payments

 German social security payments paid to Dutch residents who normally work in Germany and spend their time idle at home are exempt if the total gross amount does not exceed the sum of EUR 15,000 (approximately USD 16,000) in a calendar year.

This exemption is based on a unilateral measure of the Netherlands published in a draft decree. This decree will be published in the Dutch government gazette shortly, after which it may be relied upon by taxpayers.

Welcome response

 The competent authority agreement between the Netherlands and Germany is very much welcome and will help Dutch employers with German resident employees and German employers with Dutch resident employees.

The quick response from both countries and the clear statements should be sufficient for taxpayers to assess the tax impact of working from home due to the COVID-19 measures.