The secondment of employees abroad raises complex tax and social security questions. From the 183-day rule to A1 certificates and permanent establishment risks — a practice-oriented overview for employers.
International Employee Secondment: Tax and Social Security Overview
Whether project work at a foreign client, establishing a new branch, or intra-group rotation of specialists — cross-border employee secondment is part of everyday business for many companies. Yet what appears at first glance to be a purely organisational matter entails considerable tax and social security risks. Missing A1 certificates can result in substantial fines, and an unrecognised permanent establishment abroad can trigger retrospective tax claims running into millions. This article provides a structured overview of the key regulations and practical recommendations.
Tax Law Fundamentals
Unlimited and Limited Tax Liability
Persons with unlimited tax liability in Germany (domicile or habitual abode in Germany pursuant to §§ 1, 8, 9 AO) are subject to German income tax on their worldwide income. During a secondment abroad, unlimited tax liability continues as long as the domicile in Germany is maintained — which is regularly the case for temporary secondments.
In the host country, limited tax liability may simultaneously arise for income earned there. Without further regulation, the same income would be taxed twice.
Double Taxation Agreements and the 183-Day Rule
Germany has concluded double taxation agreements (DTAs) with over 90 countries, which allocate taxing rights between the contracting states based on the OECD Model Convention (OECD-MA).
For employees, Art. 15 OECD-MA is the central provision. The general rule is: the taxing right lies with the state of activity. An important exception is the 183-day rule (Art. 15 Abs. 2 OECD-MA). Under this rule, the taxing right remains with the state of residence (Germany) if all of the following conditions are cumulatively met:
- The employee is present in the host country for no more than 183 days within a twelve-month period
- The remuneration is paid by an employer who is not resident in the host country
- The remuneration is not borne by a permanent establishment of the employer in the host country
If even one of these conditions is not met, the taxing right lies with the host country.
Counting the 183 Days
The method of counting the 183 days varies by DTA. The relevant period may be:
- The calendar year
- The tax year of the respective country
- A rolling 12-month period
All days of physical presence in the host country are counted, including arrival and departure days, weekends, public holidays, and sick days. Precise documentation of days spent is therefore indispensable.
Exemption with Progression
Where income is exempt from tax in Germany under a DTA, it is frequently subject to the exemption with progression pursuant to § 32b EStG. This means that the foreign income is not taxed but increases the tax rate applied to other German income. This can result in a considerable additional burden that must be factored into the overall planning.
Social Security Aspects
A1 Certificate within the EU/EEA
Within the EU, EEA, and Switzerland, Regulation (EC) No. 883/2004 governs which national social security system applies to an employee. The principle is the employment country principle: social security contributions are due in the country where the work is performed.
For temporary secondments (Art. 12 Reg. 883/2004), the employee may remain in the social security system of the sending state, provided that:
- The expected duration of the secondment does not exceed 24 months
- The employee is not replacing another seconded person
- The employer maintains substantial activity in the sending state
Proof is furnished through the A1 certificate, which must be applied for from the competent social security authority. In Germany, this is typically the Deutsche Verbindungsstelle Krankenversicherung – Ausland (DVKA) or the relevant health insurance fund.
Obligation to Carry and Sanctions
The A1 certificate must be carried by the employee during every cross-border assignment. In many EU member states — particularly France and Austria — substantial fines are imposed for failure to present an A1 certificate (in France, up to EUR 3,268 per violation). Even single-day business trips require an A1 certificate.
Radiation Effect under § 4 SGB IV
For secondments to countries outside the EU with which a bilateral social security agreement exists, or where no agreement exists, § 4 SGB IV is the relevant provision. Under this rule, German social security provisions continue to apply if:
- The secondment is limited in time from the outset
- The employee is seconded within the framework of an employment relationship existing in Germany
- The domestic employment relationship continues (right to give instructions, salary payments, integration)
Bilateral Social Security Agreements
Germany has concluded bilateral social security agreements with numerous non-EU states, which, similar to the EU Regulation, avoid double contribution obligations. However, the scope of the insurance branches covered varies considerably — some agreements cover only pension insurance, while others also include health and accident insurance.
Employer Obligations and Compliance
Payroll Tax Registration and Payment
As an employer, you are generally obliged to withhold payroll tax as long as the employment relationship exists in Germany. Where taxation in the host country applies, you must assess whether and to what extent:
- An exemption from German payroll tax withholding is available (upon application by the employee to the local tax office pursuant to § 39b Abs. 6 EStG)
- Local payroll tax obligations exist in the host country and how they are to be met
Split Payroll
Where work is divided between multiple countries, a split payroll may be required. The salary is allocated to the relevant countries in proportion to working days and taxed locally in each. This requires:
- Precise documentation of working days per country
- The establishment of parallel payroll systems
- Coordination with local tax advisors in the host country
Permanent Establishment Risk from Seconded Employees
An often underestimated risk is the creation of a tax permanent establishment abroad through the activities of seconded employees. Under Art. 5 OECD-MA, a permanent establishment may arise where:
- The employee has a fixed place of business in the host country (e.g., a permanently used office)
- The employee acts as a permanent representative within the meaning of Art. 5 Abs. 5 OECD-MA and regularly concludes contracts on behalf of the company
The consequence of establishing a permanent establishment is a local corporate tax obligation of the sending company in the host country — including the necessity to allocate a proportionate profit to the permanent establishment.
Practical Compliance Checklist
Before every international secondment, you should systematically review the following points:
- DTA analysis: Which double taxation agreement applies? How is the 183-day rule calculated?
- Social security: A1 certificate applied for? Bilateral agreement in place?
- Presence documentation: System for recording days of presence implemented?
- Payroll tax: Exemption certificate applied for? Local payroll tax obligations reviewed?
- Permanent establishment risk: Nature and duration of activity reviewed? Powers of attorney limited?
- Work permit: Work authorisation in the host country obtained?
- Contractual arrangements: Secondment agreement or addendum to employment contract prepared?
Net Guarantee and Cost Equalisation
Net Guarantee Concept
In international secondments, it is standard practice to grant the employee a net guarantee (tax equalisation). This ensures that the employee is neither better nor worse off in tax terms as a result of the secondment compared with a comparable position in the home country.
The employer assumes the taxes incurred abroad and settles the difference against the hypothetical German tax burden. This requires a hypothetical tax calculation (hypo tax) and an annual reconciliation after the tax returns in both countries have been filed.
Repatriation
Plan the return of the employee at an early stage. Tax after-effects (e.g., retrospective tax assessments from the host country, exemption with progression) can arise for years after the return. Ensure that responsibilities for the settlement process are clearly defined.
Conclusion
International employee secondment requires careful planning at the intersection of tax law, social security law, and employment law. The complexity of the regulations and the considerable financial risks of non-compliance make early professional advice indispensable.
The team at compleneo supports you in the tax and social security structuring of international secondments — from the preliminary analysis through ongoing compliance to the repatriation of your employees.
