Taxation of a Salary for an Employer Active in the USA and Germany

For global nomads, it is nothing special that one lives here and simultaneously there. It is also nothing special when a company has branches here and there and abroad. Taxation will become difficult when both become mixed. In the reported case, an American corporation with an independent German branch hired a person to work in Germany as well as in the States. Where is this employee to be taxed? The BFH judgment of June 5, 2007, re I R 1/06 (published on August 29, 2007) has an answer to this question.


Daniel is living in Germany and employed by an American corporation. This corporation has its site in the States and a branch in Germany, which is full liability for German taxation. During the years in dispute (1998 - 2001), Daniel had to work up to 15 days in the United States and the remaining days in Germany. Daniel declared in his tax returns that this income was tax exempt and subject to progression. “Subject to progression” means that this exempt income will not be directly taxed but it will be considered for a special tax rate (§32 b EStG). However, his tax office wanted to fully tax this American income.

The Federal Tax Court considered Daniel as subject to German taxation in full (§1 I EStG) and therefore liable with his worldwide income for income tax. Since he partially worked in the United States, the question arises, is this income not to be taxed over there. This question is be answered by a double taxation agreement between two countries. The Federal Republic of Germany and the United States of America have such a bilateral treaty. With a person resident in Germany, certain earnings are excluded from being assessed for German taxes if they can be taxed according to art. 23 Abs. 2 DTA-USA/D in the other Contract State. From the legal perspective, Daniel has residence in Germany (art. 4 I1 DTA-USA/D). Among the sources of income that fall under this regulation are e.g. from dependent personal services. For that reason, salaries, and similar remunerations, that a person resident in a contracting state receives from dependent work, can only be taxed in this state (Residence State). Exempt from this regulation is income from an activity in another contracting state (Activity State). Income derived in the Activity State is to be taxed in this state (art. 15 I 1 DTA-USA). Since Daniel also worked in the Activity State, the United States, clause 2 of art. 15 I DTA-USA has to be applied. This regulation sets an exception to the case when, like in Daniel’s case, next to income in the Residence State, salary was earned in the Activity State. This is why Daniel was subject with his German income to the tax assessment of his local Finanzamt and with his American income to Uncle Sam.

Published on the old CMS: 2007/10/23
Read on the old CMS till November 2008: 153 reads

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