In the context of international employee assignments within a group of companies, the receiving company located in Germany can be the domestic employer if it economically bears the wages for the work performed for it (Sec. 38 (1) sentence 2, 1st clause of the German Income Tax Act old version; as of January 1, 2020: “(...) or would have had to bear the wages according to the arm’s length principle”). Like a civil law employer, such an economic employer is also obliged to withhold, register and pay wage tax. If an economic employer position is not correctly identified in advance, disputes with the tax authorities are regularly pre-programmed. The ruling of the German Federal Fiscal Court dated November 4, 2021 (Case No. VI R 22/19) is helpful in this regard, as it sets out principles as to when a receiving company located in Germany is to be regarded as an economic employer.
In the case in dispute, a parent company located in Switzerland (= sending company) delegated to its German subsidiary (= receiving company) on an interim basis under a service agreement a managing director who was domiciled in Switzerland and was also a member of the board of directors of the parent company and CEO of the group of companies. He acted for the German company solely by reason of his appointment; a managing director service agreement was not concluded. The monthly lump sums to be paid by the German company to the Swiss company for the assignment were based in terms of amount on the remuneration of its previous managing director; the remuneration that the managing director received from the Swiss company remained unchanged. In the opinion of the tax office, the German company was the economic employer of the managing director and thus obliged to withhold wage tax on the monthly lump sums payable to the Swiss company. The Fiscal Court followed this without restriction. However, in the course of the appeal proceedings, the German Federal Fiscal Court complained that the facts of the case had not been sufficiently clarified and remanded the case back to the Fiscal Court.
It is undisputed that the use of the managing director was in the interest of the German company. However, this alone is just as insufficient for an economic employer position as the fact that the German company paid the monthly lump sums to the Swiss company which were based on the remuneration of its previous managing director. Because it does not result from this that the monthly lump sums, according to their economic content, were also related to the wages paid by the Swiss company to the managing director. For example, the agreement on which the dispute was based neither contained a clause on the reimbursement of the wages to be paid to the managing director, nor were the work activities to be performed vis-à-vis the receiving company, their temporal scope or the concrete remuneration to be paid for them clearly formulated.
The German Federal Fiscal Court therefore interprets the agreement between the two companies as meaning that the Swiss company owed the assignment of the managing director and the German company obliged itself in return to pay the monthly lump sums to the parent company. Thus, the remuneration of the managing director would only have been a price component of the monthly lump sums and the German company would not have been assumed to be the economic employer.
In the case of corporate management entities, a distinction must also be made between the position of the corporate management entity and the employment relationship on which it is based. Appointment and dismissal as a representative organ are exclusively corporate legal acts by which statutory competences and competences under the articles of association are transferred or withdrawn. In contrast, the appointment for the purpose of acting as a representative organ is regularly a bilateral contract under the law of obligations. If, as in the case in dispute, a managing director service agreement is missing, it is therefore not possible to determine whether and to what extent the managing director was integrated into the work processes of the receiving company and was subject to its instructions. The position of managing director alone is therefore not sufficient for classification as an economic employment relationship.
The ruling shows once again that careful structuring is the key to success in employee assignment cases. In this respect, it is to be welcomed that the German Federal Fiscal Court refers the case back to the Fiscal Court and demands a complete clarification of the facts; to this end, it has imposed a number of examination priorities to the Fiscal Court. The final assessment by the Fiscal Court remains eagerly awaited. However, the fact that the proceedings still relate to an earlier legal situation is not materially significant. Are you planning to assign your employees globally within a group of companies? We will be glad to advise you and present customized solutions with a tax-optimized focus for your company.