Possible personal tax obligation in Germany for employees from Japan - Retirement Allowance and secondment to Germany

If Japanese are entitled to a “Retirement Allowance” they mostly get a one-off payment in addition to an old-age pension. In case of being delegated to Germany during a part of their working life, there is a possibility to personal tax duty in Germany.

First of all both components of the “Retirement Allowance” have to be distinguished from one another. In the main case of an old-age pension article 18 DTA Germany-Japan assigns the right of taxation to the country of residence of the payment recipient. In this case Japan is the country of residence so Germany does not have any right of taxation for the old-age pension. A different rule applies to the one-off payment. Basically it is paid as a compensation for the untimely ending of the employment. The Japanese employer pays it to his Japanese employee for the loss of his job.

If nevertheless the Japanese employee receives the one-off payment during his secondment to Germany, it is mostly subject to taxation in Germany on basis of article 15 section 1 sentence 2 DTA Germany-Japan. Occasion for the one-off payment during the secondment can be e.g. a group-internal transfer to another German company. Then the employer would have to check if there is any obligation to withhold and transfer income tax to the German tax office.

The classification of the one-off payment is decisive

– is it a compensation for the loss of the job or is it a payment for accomplished work? According to interpretation either Japan or Germany has the right of taxation.

The differentiation between settlement and wage is regulated in Germany as follows: For the presentation of a settlement it has to be a replacement for escaped or escaping income because of the loss of the job of the employee or for non-exercise of work (§ 34 section 2 in conjunction with § 24 no. 1 of German Income Tax Act). In case of a compensation of accomplished work, the one-off payment would be classified as wage.

As far as the following conditions are accumulated, the tax duty in Germany can be avoided, provided that the one-off payment is classified as wage:

   - The Japanese employee stays less than 183 days per year in Germany
   - The one-off payment is paid by the Japanese employer with headquarter in Japan
   - The one-off payment is not paid by a permanent establishment in Germany

In this case the one-off payment would be released from the German tax with regard to article 15 section 2 DTA Germany Japan.

If it is a payment for the loss of the job there would be the same result – no German right of taxation according to article 22 DTA Germany-Japan.

Since very recently in the Asian region also the financial administration of China has its focus on Chinese employees who are seconded abroad. Increasingly far-reaching examinations are carried out to private individuals with foreign source income. Till the end of 2015 effective, internationally coordinated regulations against profit shortenings and profit misalignments should be compiled by the OECD with an action plan.

All in all the possibility to personal tax duty in Germany cannot be underestimated. If Japanese are entitled to a “Retirement Allowance” it is very important that the reason of the one-off payment is clearly regulated! As long as possible it would be better not to receive the one-off payment while the Japanese employee is sent to Germany.