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Current developments in international mobility

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​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​published on November 5, 2024 | Reading time: 11 minutes

In our latest edition of Global Mobility Pulse, we look at important topics relating to international mobility. These include the changes to the electronic wage tax certificate from 2025 and the right to tax wages during the irrevocable exemption from work performance. We also discuss a recent decision by the Hamburg tax court, according to which employer contributions to a pension fund are considered cash wages and not benefits in kind. In addition, we provide information on the introduction of the new EU border control systems EES and ETIAS and offer solutions for companies to employ foreign students in times of a shortage of skilled workers. Finally, we look at employer payments for compulsory application insurance in statutory pension insurance in accordance with Section 4 (1) No. 2 SGB VI and the new digital visa application procedure via the international portal.
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​Important changes to the ele​​​​​​​ctronic payroll tax form from 2025​​

Abolition of the one-fif​th rule​

On 5 September 2024, the Federal ​Ministry of Finance (BMF) published an updated letter​ on the electronic payroll tax form, which will come into force from the 2025 calendar year. The te​mplate for printing out the payroll tax form has also been published. Here is the summary of the most important changes:


​From 2025 on, the reduced taxation under the one-fifth rule (§ 34 (2) of the German Tax Act (EStG)) will no longer be applicable in the payroll tax deduction procedure. This means that the following changes will apply:
  • Number 9: Here, pension payments for several calendar years will be reported.
  • Number 10: This row will show compensation (e.g. severance payments) and salary for several years.


Unlike previously, the corresponding amounts will in future also be included in gross salary (number 3). 
  • ​Numbers 11-14: The payroll tax due on these amounts will no longer be shown separately, so these fields remain empty.


Spec​​ial features​​ of the deferred taxation of interests in assets per § 19a EStG

As, in the year of the transfer, the non-cash benefit is not yet taxed but is already subject to the obligation to pay social security contributions, the social security contributions on the non-cash benefit that has not yet been taxed must be reported under numbers 22 to 27. As before, social security contributions attributable to other tax-free salaries may not be disclosed in the tax form. The allocation is made on a pro-rata basis based on the relation of the taxable salary to the total salary earned in the period covered by the tax form. Here, benefits not yet taxed under § 19a (1) EStG are regarded as taxable salary.

​Other changes

  • Payroll tax deduction by a third party: Third parties obliged to deduct payroll tax as per § 38 (3a) sentence 1 EStG must submit an electronic payroll tax form for every employee.
  • No payroll tax form if no salary is earned: The tax form will not have to be filed if no salary was paid, even if the employer uses ELStAM.
  • Tax-free wage replacement benefits: Tax-free wage replacement benefits that are subject to the progression clause must be reported under Number 15. This also includes the training allowance introduced as of 1 April 2024 (§ 82a SGB III). A new number 15a will be added to address short-time allowance and seasonal short-time allowance.
  • Amending the tax form: It will be possible to amend already filed electronic payroll tax forms by 28 February of the following year.
  • Change from 2026: The row concerning contributions to private basic health and compulsory long-term care insurance (Number 28) will be dropped from 2026, because only amounts paid as part of ELStAM may be considered when calculating payroll tax and the minimum pension flat-rate will no longer apply.

Allocation of the taxation right over salary during irrevocable gardening leave 

In its judgement of 1 August 2024 (case no. VI R 32/22), the Federal Fiscal Court (BFH) ruled that the right to tax salary that an employee receives during the period of irrevocable gardening leave until the contractually agreed termination of the employment relationship per Article 15 (1) sentence 1 of the tax treaty with Switzerland is exclusively vested in the country of residence (as also stated by the tax authorities in para. 362 of the BMF letter of 12 December 2023, German Federal Tax Gazette [BStBl.] I 2023, 2179).

In this referenced case, an employee with unlimited income tax liability and resident in Germany within the meaning of the tax treaty with Switzerland was employed by a Swiss company. The company terminated the employee’s employment in April 2016 with effect from 31 October 2016 and irrevocably put the employee on gardening leave with immediate effect while continuing to pay his salary. A non-competition clause originally agreed in the employment contract was set aside.

The BFH ruled that the employee did not qualify as a cross-border commuter within the meaning of Article 15a (2) of the tax treaty with Switzerland during the period of active employment until the gardening leave as there was an excessive number of days when he did not return to Germany. Therefore, only the salary attributable to the days he actually worked in Switzerland was exempt from taxation in Germany. During the gardening leave, the employee could not have qualified as a cross-border commuter because he no longer regularly returned to his German place of residence and no longer actively worked in Switzerland. The employee also did not carry out work within the meaning of Article 15 of the tax treaty with Switzerland on the grounds of fulfilling another obligation towards the Swiss employer. As the employee was irrevocably put on gardening leave, he did not have to make himself available to his Swiss employer in any way during the gardening leave.

The salary paid for the period of gardening leave should be taxed in full in Germany. As the employee was put on paid gardening leave from April 2016, he was under no obligation to work under the employment contract and he was not entitled to demand being assigned work. However, a large number of his rights and obligations still continued to apply, e.g. the employee's right to continued payment of salary and social benefits. Payments made during the gardening leave therefore do not constitute severance payments that are paid in the event of the termination of employment, but payments in the event of fulfilment of modified work (see also BFH judgement of 27 April 1994, German Federal Tax Gazette [BStBl.] 1994 II, 653). As the employee was not subject to a non-competition clause during the gardening leave, the BFH did not consider the payments during the gardening leave to constitute compensation for complying with the non-competition clause, which might be taxable in the country where he previously worked. 

There is a case pending under case no. VI R 12/24 where the BFH has to decide on the allocation of the right of taxation under the tax treaty law in the case of irrevocable gardening leave if a non-competition clause exists.

In its judgement of 15 March 2024 (case no. 8 K 883/23), the Munich tax court ruled that an employee resident in Switzerland is still subject to (limited) tax liability in Germany if he receives a salary from his German employer during the period of irrevocable gardening leave and is not permitted to carry out any work due to a non-competition clause agreed in the termination agreement.

The employee had his only place of residence in Switzerland and worked in Germany for a German employer. The employment was terminated in May 2018 at the initiative of the employer with effect from 31 December 2018. Following the termination agreement, the employee was irrevocably put on gardening leave from May 2018, and continued to be paid the previous fixed salary and other benefits. A non-competition clause was agreed to apply until the end of the employment. The employer withheld payroll tax from the total salary paid in 2018. 

As part of the complaint proceedings, the tax court rejected the employee's claim for the reimbursement of payroll tax on procedural grounds. The legal basis for the payment of payroll tax was the employer's payroll tax returns, against which the employee had not lodged an objection and for which the ‘subject to review’ proviso ceased to apply in 2023. Therefore, payroll tax was no longer reimbursable per § 37 (2) of the German Tax Code (AO). The employee could not claim reimbursement under § 15 sentence 4 of the Regulation on the Implementation of Consultation Agreements between the Federal Republic of Germany and the Swiss Confederation (KonsVerCHEV) either, as this Article does not constitute an independent legal basis for claiming reimbursement, but only contains a reference to § 37 (2) of the German Tax Code (AO).

Furthermore, with respect to substantive law, the Munich tax office was of the opinion that the taxation right over the salary during the irrevocable gardening leave lied with Germany. Payments made in connection with a non-competition clause (which establishes an obligation to refrain from carrying out an activity comparable to the activity performed) agreed in an employment termination agreement are subject to the rules on the allocation of the right of taxation over severance payments laid down in tax treaties (this view was also taken by the tax authorities in sec. 369 of the BMF letter dated 12 December 2023, German Federal Tax Gazette [BStBl.] I 2023, 2179). As the right of taxation over severance payments has generally been allocated to the country of earlier employment since 1 January 2017 as per § 50d (12) sentence 1 EStG, remuneration for observing a non-competition clause would also lead to the allocation of the right of taxation to the country of earlier employment. 

Fiscal Court Hamburg: Employer contributions to a pension fund that grants the employee an entitlement to cash benefits in the form of pensions or lump-sum settlements constitute cash remuneration and not a benefit in kind within the meaning of § 37b (1) and (2) of the German Tax Act (EStG)

For the flat-rate tax provision under § 37b (1) and (2) EStG to apply, a granted benefit must be in-kind. Whether a specific case involves a benefit in kind or cash remuneration is determined based on the legal grounds on which the benefit is received; this also applies following the introduction of the legal definition of in-kind compensation in § 8 (1) sentences 2 and 3 EStG on 1 January 2020. 

​​​According to the case law of the BFH, decisive is whether the employee can claim an item or cash remuneration from the employer. If the employee can only claim an item, this is an in-kind benefit within the meaning of § 8 (2) sentence 1 EStG. It is irrelevant whether the employee receives the item directly from the employer or obtains it from a third party at the employer's expense. It also does not matter whether the employee himself is a party to the contract with the third party or whether it is the employer who obtains the in-kind benefit from that third party. However, if the employee is entitled to be paid cash remuneration equivalent to the value of the item instead of receiving the item from his employer, this constitutes cash remuneration and not remuneration in kind.
(See also no. 5 of the BMF letter dated 15 March 2022, German Federal Tax Gazette [BStBl.] 2022 I, 242)

In its judgement of 14 March 2024 (case no. 6 K 109/20), the Hamburg tax court ruled that employer contributions to a foreign pension fund from which employees seconded from abroad are entitled to receive a cash benefit in the form of a pension or lump-sum settlement in the future constitute cash remuneration. The reason for this was the application of the general principles for differentiating between cash remuneration and in-kind compensation. In the present case, the employees were granted a direct claim from the pension fund upon the occurrence of one of the insured biometric risks (old age, disability, death). However, the claimed compensation was not in kind like a service or the transfer of ownership of an item. The claimed compensation consisted of a cash benefit like an old-age pension, disability pension, pension to surviving dependants or, under certain conditions, a cash lump-sum from the employees’ pension pot. This is also different from benefits securing the employee’s future where the employer provides the employee with additional health insurance cover. This additional health insurance cover provided by the employer grants the employee entitlements to medical treatment, medication, etc., i.e. only to benefits in kind and can therefore also be taxed according to the principles for benefits in kind. 
(See para. 6 of the BMF letter dated 15 March 2022, loc. cit.)
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The fact that the referenced case involved an international nexus does not change the assessment of the pension fund contributions as a cash benefit. The employees from abroad remained covered by the pension fund of their home country, while the group company based in Germany bore the payments into the pension fund for the employees of the foreign associated enterprise that were deployed to Germany in the relevant years 2012 to 2015. In the opinion of the Hamburg tax court, the contributions in excess of the tax-free amount pursuant to § 3 No. 63 EStG constituted cash remuneration. An appeal against the judgement of the Hamburg tax court is pending before the BFH under file number VI R 13/24 .​

New EU border controls: Introduction of the EES and ETIAS systems

A Schengen-wide Entry/Exit System (EES) and a European Travel Information and Authorisation System (ETIAS) are going to be introduced as part of the EU's “Smart Borders” initiative. The EES will be used to record the personal data of non-EU nationals who cross the external borders of the Schengen area, regardless of whether visa-free or visa-required. Travellers' permitted length of stay in the Schengen area will be calculated electronically so the stamp in the passport will soon be no longer necessary.

The following personal data will be collected:
  • date, place and time of entry and exit
  • the national’s name
  • the national’s passport number
  • the national’s photograph
  • the national’s fingerprints
  • refusal of entry (if any) 

The ETIAS is an online registration system for visa-exempt third-country nationals who are planning a short-term stay in the Schengen area. The ETIAS serves as a travel authorisation and is required for the entry into the Schengen area member states. In a speech to the EU IT agency EU-Lisa​, which has developed the EU-wide IT infrastructure for the EES, the EU Commissioner for Home Affairs, Ylva Johansson, said that the Entry/Exit System would go live on 10 November. The ETIAS is scheduled to be implemented in 2025.​​
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​Foreign students: A solution for businesses in times of skills shortages

Employer's payments into compulsory insurance upon application as part of pension insurance per § 4 (1) No. 2 SGB VI

Compulsory insurance upon application as part of pension insurance in international assignments

According to the territoriality principle applicable in social insurance, employees are generally subject to the social insurance law of the country where they physically carry out their work. In countries which have no social security agreement with Germany, it is impossible to remain covered by the German social security system through an exemption agreement. However, in order to avoid periods where the employee is not covered by the German pension insurance, employers can request that the employee be covered by the so-called compulsory insurance upon application with the German Pension Insurance Association (DRV). As a rule, this insurance coverage is irrevocable and cannot be cancelled as long as the employee performs the covered activity abroad or the circumstance giving rise to the application for coverage continues to exist. The insurance coverage only ends at the end of the day when the conditions under § 4 of the Volume 6 of the German Social Insurance Code (SGB VI) are no longer met. The request must be submitted by an entity in Germany – usually the German employer, and not by the employee themselves.

How to treat employer payments into compulsory insurance upon application in payroll tax terms

Employer payments to secure the employee's future are tax-exempt under § 3 No. 62 of the German Income Tax Act (EStG) if they are mandatory under social insurance law or other statutory provisions. Compulsory insurance upon application is one of these mandatory measures securing the future of an employee.

Even if the employer files the application for coverage voluntarily, the employer is under the legal obligation to bear and pay the pension insurance contributions in full for the duration of the insurance cover (§ 170 (1) No. 4 SGB VI). It is also possible to enter into an agreement whereby the employee pays part of the contributions themselves. This option is commonly used in practice, so that the employee's portion is often borne by the employee and the employer only pays the employer's portion. This is because the insurance status at the time of paying the contribution is essential here. The decision of the competent social insurance institution in this respect has a binding effect on the taxation procedure, unless it is clearly unlawful. Consequently, payments required by the social insurance institution are tax-exempt per § 3 No. 62 EStG .
(See Brandis/Heuermann/Valta, 171st EL March 2024, EStG § 3 No. 62 margin no. 3, 4).

A new procedure: Digital visa application via the Consular Services Portal​​

It is now possible to apply for selected visa types online via the Consular Services Portal of the Federal Foreign Office. By introducing the Portal, Germany is taking a step towards the digitalisation of immigration processes. This creates exciting opportunities for companies that rely on international skilled labour. 

The Consular Services Portal is currently in the pilot phase. At present, only online applications for certain types of visa, for example, the Opportunity Card (Chancenkarte) or the Blue Card (EU), are available at selected diplomatic missions abroad. It is currently not known when an extension is planned to include other residence permits for employment, such as the ICT card. This paperless process is intended to speed up processing, reduce errors and allow applications to be checked in advance by the relevant diplomatic missions abroad so that incomplete information can be corrected in good time. It remains yet to be seen how far the digital application procedure will improve or speed up processes. Please contact us if you have any questions about the new developments.​

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