From 1 January 2025, there will be new regulations Lohnsteuer on salery-split, according to the German Finance Ministry. For cross-border workers, who work for their employer partly in Germany and partly in another country, not the monthly table but the daily table will apply when calculating the monthly Lohnsteuer. This Lohnsteuer is then not only determined based on the German part of the monthly salary, but also the monthly salary not taxed in Germany is then included to determine the tax rate (so-called progression). This increases the Lohnsteuer payable. This can amount to hundreds of euros per month.
The German tax law has not changed per se and so an employer may take the position that the new regulations are not legally valid. However, when inspected by the German tax authorities, the auditor is bound by the new decree. If the audited employer has not applied the daily table then an additional levy of Lohnsteuer, plus interest but probably no penalties, will undoubtedly follow.
The tax authorities in Germany can levy after-tax for the past five years. Recovering this Lohnsteuer from the employees will be difficult, especially in case these employees are no longer employed by you in the meantime. Of course, it is possible to object and appeal against the correction. However, such a procedure is a long-winded affair and naturally involves costs. And while there are certainly arguments against the new regulations, it is uncertain how the German courts will rule on the matter. The only safe option for employers is therefore to apply the new rules from 1 January 2025.
Lower net wage
In principle, the change in German regulations will fall on the frontier worker and not on his or her employer. The steep drop in their net pay will undoubtedly cause upheaval. Employers would therefore do well to clearly communicate any compensation scheme, or lack thereof, to their employee.
Compensation scheme
The tax treaty between the Netherlands and Germany includes a compensation scheme. In short, this scheme means that if the employee has to pay jointly more tax and national insurance contributions in Germany and the Netherlands than if he were working entirely in the Netherlands, this difference is compensated by the Dutch tax authorities via the income tax return.
The higher German Lohnsteuer will cause a possible benefit of the salary-split to disappear. The compensation scheme will prevent (for those who are socially insured in the Netherlands) a disadvantage compared to working fully in the Netherlands. However, it can take more than a year for the compensation to be granted by the tax authorities. As a result, an employee claiming the compensation scheme has a cash flow disadvantage.
No action from the Dutch finance ministry for now
The tax treaty stipulates when and on what salary Germany may tax. It stipulates that the country of residence has the right to include income taxed in the country of work in the base to determine the tax rate. Nowhere does it stipulate that the country of employment may do the same. In our view, the new German rules are therefore inconsistent with the tax treaty. For the time being, the Dutch Ministry of Finance takes the position that the new Lohnsteuer rules are an internal German matter and is not taking any action. They further await the impact on the cost of the compensation scheme.
Impact new Lohnsteuer
The new German regulations around Lohnsteuer can have a significant impact on both employers and cross-border workers. In order to avoid surprises and possible retroactive levies, it is wise to assess the impact on your organisation and your employees in good time.
Should you require further information, please contact Mr Ton Hendriks (t.hendriks@boladviseurs.nl) of the Internationalisation Committee, or your own accounting firm.
