What is a double taxation agreement (DTA)?
A double taxation agreement (DTA) is an international treaty between two countries or jurisdictions. The main aim of a DTA is to prevent the double taxation of income that could be taxable in both countries if no agreement existed. Double taxation occurs when a taxpayer has to pay tax on their income in two different countries, which can lead to an unfair burden.
A DTA typically specifies:
- Which country has the right to tax certain types of income: The agreement determines which country has the sole right to tax certain income such as dividends, interest, royalties, salaries, etc.
- Methods to avoid double taxation: The DTA establishes mechanisms for how taxes paid abroad can be credited or deducted from the tax owed domestically.
- Rules for information exchange: DTAs may include provisions for the exchange of tax-relevant information between the contracting states to combat tax evasion.
- Definitions and dispute resolution procedures: They clarify terms and establish procedures for resolving tax disputes between the contracting states.
The exact provisions in a DTA vary from agreement to agreement and depend on the interests of the countries involved. DTAs are important for easing the tax burden on individuals and companies earning cross-border income, and they help promote international business activities and investments.
You can find information on the DTAs concluded by Germany here: Double taxation agreements and other agreements in the tax sector
(2023): What is a double taxation agreement (DTA)?
What is tax-free wages 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 ATE if there is no double taxation agreement with the relevant country and the work lasts for at least three consecutive months. Illness or holidays do not affect the duration of employment but are 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, income taxed abroad is included in the progression clause in Germany. This means that a total income is calculated from 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 a particularly 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.
Note: More and more double taxation agreements are currently being amended to give special consideration to home office days. In individual cases, it should therefore be carefully checked where the right of taxation lies.
(2023): What is tax-free wages under DBA/ATE?
