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To China with a German Employer –What do I Need to Know about Taxes?
by Thomas Batsching
You are already working in Germany and your boss would like to send you off to China for a few years? How does that work? Do I have to be nervous about any disadvantages? Here is some information.
If you are to be working in China, or elsewhere abroad, for a long period of time then there is a lot to take care of. These include questions about your work contract and compensation, but also the topics of social security and taxes - and that is not always so easy!
Over three entries you will be informed of the basics of an expatriation abroad, tax topics and questions on social security.
Since the essentials of being posted to a foreign country and Social Security issues were covered in the last two articles, this one includes information about taxes. Admittedly, tax sounds pretty boring, but it is important! In case of an expatriation to China, the issue of Income Tax is uncritical. This due to the fact that a ‘Double Taxation Agreement’ (DTA) between Germany and the People’s Republic of China is agreed upon. So, taxes for income in China need to be paid there and not in Germany provided that China is the expatriate’s ‘centre of vital interests’. Expatriates being sent from Germany to China enjoy a ‘restricted tax liability’ in Germany.
Unfortunately, it’s now getting a bit more tricky! In case an employee works abroad for a period of less than appr. six months, the so called ‘183-Days Rule’ is the big exemption to the DTA. This 183-Days Rule says that Germany has the right of taxation for work in China in case …
- the employee did not spend more than 183 days in one calendar year in China
- remuneration was not paid by resp. for an employer who is established China
- Remuneration will not be covered by an establishment in China.
One more thing: In case of restricted tax liability in Germany, income that was generated in Germany, e.g. rental income, is taxable in Germany. And even more complicated: By taxing such income, the so-called ‘Exemption with Progression’ (Progressionsvorbehalt) is applicable.
Moreover: Unfortunately, the ‘splitting-method of married couples’ (Ehegattensplitting) can also not be applied.
Upon request either by employer or by employee, the German Tax Authorities will file a certificate of exemption for restricted tax liability in Germany (Freistellungsbescheinigung). In case this certificate is provided, then remuneration components being paid in Germany (e.g. in case of ‚split-payroll‘) are not taxable in Germany. These payments are taxable in the state in which the work is carried out.
.. I confess: All this is quite complicated! In case of any questions, please do not hesitate to contact me (+49 171 752 4871 or firstname.lastname@example.org).
Part 1: To China with a German Employer - How does my work contract look?
Part 2: To China with a German Employer – What do I Need to Know about Social Insurance?