27 Jul 2022

Cross-border commuter severance pay must be fully taxed

In France, Switzerland, and Austria, cross-border commuters pay income tax in the country in which they reside. But this is not true in every case. For example, an employee from France must pay tax in Germany on a severance payment from a German employer.

The provisions and special regulations governing the income tax of cross-border commuters can be quite complicated in certain cases. They are intended, however, to at least ensure that workers who live on one side of the border and earn their living on the other do not have to pay taxes twice on their wage or salary.

"Special cross-border commuter regulations" for Austria, France, and Switzerland

Germany has concluded a double taxation agreement (Doppelbesteuerungsabkommen, DBA) with all neighboring countries. As a rule, an employee who works in one country and resides in the other pays income taxes only in the so-called "country of work," not in the " country of residence."

In three cases, however, things are the other way around, at least for cross-border commuters. A "special cross-border commuter regulation" of this kind exists with respect to Austria, Switzerland, and France. Here, cross-border commuters must pay their income tax in their country of residence. (As to who qualifies as a cross-border commuter, there are different requirements in the three cases, which we have summarized in the Income Update issue.)


Severance pay of cross-border workers

Everyday matters like the payment of a severance package can get complicated quickly in the case of a cross-border commuter. This was also the reason why the issue was taken up by the Baden-Württemberg Fiscal Court (FG Baden-Württemberg, Jan. 16, 2018 - 6 K 1405/15). In 2008, a cross-border commuter moved across the border to France, but continued to work in Germany for the same employer he had worked for since 1987 until 2014.

He was thus a cross-border employee from 2008 to 2014. Although he worked in Germany, he paid income tax only in France. The employment relationship then came to an end and the employee received a severance payment. In return, the German tax office demanded a proportionate amount of income tax.

It based its claims on a simple calculation: The person was employed by the employer for a total of 330 months. Of these, he lived 260 months in Germany and 70 in France. He therefore had to pay wage tax on 260/330 of the severance payment amount, while, according to the tax office, 70/330 was to be tax-free in Germany.


The lawsuit backfires

The former border crosser was not happy about this. He didn't intend to pay any income tax at all on the severance pay in Germany. So he filed a lawsuit in fiscal court, arguing that the right of taxation for the severance payment lay with France.

Unfortunately, the judges not only decided differently than he had hoped, but also went against the assessment of the tax office. According to the ruling, the severance payment was subject to taxation in Germany not only in part, but in full. In its decision, the court pointed out that cross-border commuters in Germany are also subject to limited tax liability (Sec. 1 (4) EStG): Tax must be paid on domestic income unless special regulations apply – as is the case with the wages or salaries of cross-border commuters. Moreover, the entire amount of the severance payment belonged to domestic income pursuant to Sec. 49 (1) No. 4 (b) of the German Income Tax Act (EStG).

The bottom line: A severance payment at the time an employee leaves his or her job is related to past employment, not current employment. However, the cross-border commuter regulation in the DBA with France only refers to an employee's current activity and requires that work and payment occur simultaneously. Therefore, when it came to the taxation of the severance payment, there was nothing to split between Germany and France.


Fortunately, "reformatio in peius" applies

The verdict was thus negative for both the employee and the employer – the latter, of course, being liable for the income tax. In the end, however, there were no financial repercussions. In fiscal court proceedings, a worsening of one's situation ("reformatio in peius") cannot result; the plaintiff may not be placed in a less favorable position than by a tax assessment that has already been issued. In this case, therefore, the severance payment was in fact taxed on a proportionate basis.


Taxes Laws and regulations

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