What is tax-free income under DBA/ATE?

This refers to tax-free wages under double taxation agreements (DTA) or the decree on employment abroad (ATE). A DTA specifies how employees working abroad must tax their income to avoid double taxation. Wages for work abroad can be tax-free under the decree on employment abroad if there is no double taxation agreement with the relevant country and the work lasts for at least three consecutive months. Illness or holiday does not affect the duration of employment but is not counted towards the three-month period.

If your salary is taxable abroad, you will be exempt from tax in Germany under the DTA or ATE. However, the income taxed abroad is included in the progression clause in Germany. This means that a total income is calculated from the foreign income and other income in Germany. This total income results in a higher tax rate, which is only applied to the income earned in Germany.

Exceptions:

• For France, Austria, and Switzerland, a special cross-border commuter regulation applies under the double taxation agreement. If you work in these countries, the wages are taxed in the country of residence, Germany.
• In Switzerland, the employer may deduct a wage tax of 4.5 percent, which is credited against the tax in Germany.
• Civil servants and public sector employees always tax their income in the country where they work, as the principle of the paying state applies.

Note: The decree on employment abroad has recently been revised. We would like to draw your attention to an important new provision: employees must prove that their wages abroad were subject to a minimum taxation. If you cannot provide proof or if there is no minimum taxation, the decree on employment abroad and thus the tax exemption in Germany do not apply. The new regulations apply to wages and other remuneration paid after 31.12.2022 or received by the employee after this date.

(2022): What is tax-free income under DBA/ATE?

When should I declare income as a cross-border commuter?

If you live in a border area and commute daily to work in a neighbouring country, you are a so-called cross-border commuter. Regarding your income, the following applies in most neighbouring countries: you must pay tax on your salary in the country where you work; the income remains tax-free in the country where you live. However, your foreign income is included in the progression clause and thus increases the tax rate for your other income.

The information must be provided in "Form N" and "Form N-AUS" or Form N-Gre. Form N-Gre concerns foreign income from employment for cross-border commuters from Baden-Württemberg to Austria, Switzerland, and France.

If you are single, work as a cross-border commuter, and have no additional income in Germany, you do not need to worry about the progression clause in Germany.

Exceptions: For France, Austria, and Switzerland, a special cross-border commuter regulation applies under the respective double taxation agreement.

If you work in France or Austria, you do not have to pay taxes there but must declare the wages in your German tax return and pay tax as normal. Civil servants or public sector employees, however, pay tax on their income in the country where they work, as the principle of the paying state applies here.

If you work as a cross-border commuter in Switzerland, your employer may deduct a wage tax of 4.5 percent, which is credited against the tax in Germany. If you are a civil servant or public sector employee, you must pay tax on your income entirely in Germany.

Please note that during the coronavirus period, there are special regulations for cross-border commuters, as many employees are or were working from home and do not or did not commute daily (see also: Double taxation agreements and other agreements in the tax sector).

(2022): When should I declare income as a cross-border commuter?