How to properly apply the Agreement of 13 May 2020 between France and Germany on the taxation of employees who work regularly in both States?
The agreement of 13 May 2020 is well known to French-resident frontier employees working in Germany and German-resident frontier employees working in France. This mutual agreement confirms that the special tax system for frontier workers provided for by the France-Germany Tax Treaty will continue to apply during the special period from 11 March 2020 to 31 December 2020, during which telework has expanded.
The agreement contains another less known provision concerning employees who are residents of one of the two States but who work regularly in both States. This situation occurs very frequently in groups of companies present on both sides of the Rhine: for example, a French resident employed by a French subsidiary of a German group who regularly goes to the group’s headquarters in Germany or, conversely, a German-resident employee of the same group who works regularly in France for the benefit of the French subsidiary. For these employees, unless they fall within the provisions relating to temporary assignments provided for by Article 13.4 of the Treaty, the principle laid down by Article 13.1 of the Treaty is that they are subject to tax in each of the two States in proportion to the number of days of physical presence for the exercise of a professional activity.
For example, a French-resident employee of a French subsidiary who works in Germany for the benefit of the parent company for 100 out of 220 days in the course of a year will be taxable in Germany on 100/220th of his or her remuneration. In France, the same employee will be taxable on 100% of his/her remuneration but will benefit from a tax credit calculated on 100/220th, to avoid double taxation.
Given the special circumstances related to Covid-19, the agreement provides that, for the period from 11 March to 31 December 2020, these employees may choose to take into account either:
- the actual days of work in each of the States, including the days of telework; or
- by tolerance, the days they would have worked in each of the States in the absence of the Covid-19 pandemic.
In the latter case, the teleworked days that ordinarily would have been worked in the other State must be confirmed in a written certificate by the employer.
As personal income tax is generally higher in Germany than in France, a French resident working partly in Germany will likely be better off not applying the tolerance measure, whereas a German resident working partly in France will likely be better off electing for its application. However, given the different tax systems in Germany and France, we recommend examining the question on a case-by-case basis.