Global Mobility Tax Seminar Income Tax Treaties and

Global Mobility Tax Seminar “Income Tax Treaties and the International Assignee“ Paris, November 1, 2011 Dipl. -Kfm. (FH) Björn Spilles 1

Agenda I. Fundamentals II. Determining “residency” according to domestic tax law, exemplarily for Germany III. The Residence Article (Art. 4 OECD-Model) IV. The Dependent Personal Service Article (Art. 15 OECD-Model) V. Methods for Elimination of Double Taxation (Art. 23 OECD-Model) VI. Excursion: Avoidance of Double Taxation in Germany VII. Case study 2

I. Fundamentals • Countries with their own national tax law systems • Employees can become subject to tax in more than one country as either residents (world-wide income base) or non-residents according to the respective domestic tax law system • Avoidance of double taxation: o Unilateral: regulated by national law o Bilateral: regulated by Double Tax Treaties (DTT) • Exact wording between particular DTTs can be different. 3

II. Determining “residency” according domestic tax law on the example of Germany Unlimited Tax Liability (taxation as resident): • Individuals, who have a domicile or their habitual abode in Germany, are subject to unlimited income tax in Germany with their entire world income. Domicile No Domicile • Every apartment, which is objectively appropriate and available for habitation (extensive definition) • Owned house / apartment which is rented out for a period of more than six month • A minimum number of days of presence / using of the dwelling is not required • Visits at friend‘s or family‘s places (not spouse) • Varying hotel rooms and short-term stays • Over night stays on company grounds (place to sleep or office: no apartment) • e. g. rental apartment, permanent renting of an hotel room, in circumstances room in parent‘s house Note: Federal Registration or Deregistration is not relevant for having a domicile in Germany 4

II. Determining “residency” according domestic tax law on the example of Germany Habitual abode • Individuals who are physically present in Germany for a continuous timeframe of more than six month have their habitual abode in Germany (short period interruptions have to be disregarded). • Exceptions (no habitual abode): o Cross-border commuters who work in Germany but do not stay over night o If the presence in Germany is founded on private reasons (visits or vacation) and does not last longer than one year Limited Tax Liability: • Individuals who have neither their domicile nor their habitual abode in Germany, are subject to income tax only on German source income. 5

III. Art. 4 OECD-Model: The Residence Article (“Tie Breaker Rule”) Has the expat a permanent home available in only one country? (Art. 4 No. 2 a OECD-Model) Has the expat his centre of vital interest in only one of the countries? (Art. 4 No. 2 a OECD-Model) Has the expat a habitual abode in only one of the countries? (Art. 4 No. 2 b OECD-Model) Is the expat a national of only one country? (Art. 4 No. 2 c OECD-Model) Mutual Agreement needed. (Art. 4 No. 2 d OECD-Model) 6

IV. Art. 15 OECD-Model: The Dependent Personal Service Article • Income from employment (dependent personal services, e. g. salaries, wages, etc. ) is regulated in Article 15 OECD-Model. • Principle: Taxation in the country in which the work is carried out (Host Country) • Exception (= taxation in the home country): o The expat is present in the state, in which the work is carried out, for a period which is not exceeding 183 days within a 12 -month-period, and o the remuneration is not paid by, or in behalf of, an employer who is a resident of the host Country, and o the remuneration is not borne by a permanent establishment that the employer has in host Country. • Special regulations for cross-border commuters, directors, professional hiring of employees, sportsmen, artists etc. 7

IV. Art. 15 OECD-Model: Scheme Is the expat present in the host country for a period exceeding 183 days in a 12 -month-period? Yes No Is the remuneration paid by, or on behalf of, an employer residing in the host country? Yes No Is the remuneration borne by a permanent establishment in the host country? Yes No home country has the right of taxation host country has the right of taxation 8

IV. Art. 15 OECD-Model: Scheme Is the expat present in the host country for a period exceeding 183 days in a 12 -month-period? Yes No Is the remuneration paid by, or on behalf of, an employer residing in the host country? Yes No Is the remuneration borne by a permanent establishment in the host country? Yes No home country has the right of taxation host country has the right of taxation 9

IV. Art. 15 OECD-Model: 183 -day clause • Duration of employment in the state in which the work is carried out • Most DTTs relate to presence in the state in which the work is carried out (exception e. g. Germany/Belgium) • The specified 183 -day limit of the respective treaty may relate to either the tax year, or calendar year, or a 12 -month-period • The days can be added up irrespectively of residency or the duration of employment; certain days are counted as full days of presence, e. g. day of arrival and departure, etc. • If “a 12 -month-period” is used as a basis, all conceivable 12 -month periods must be taken into account, even if they partially overlap. 10

IV. Art. 15 OECD-Model: example: 183 -day clause within a 12 -month-period Host country can tax employment income related to work days in host country between July 2011 and January 2012 (pro rata temporis) 11

IV. Art. 15 OECD-Model: Scheme Is the expat present in the host country for a period exceeding 183 days in a 12 -month-period? Yes No Is the remuneration paid by, or on behalf of, an employer residing in the host country? Yes No Is the remuneration borne by a permanent establishment in the host country? Yes No home country has the right of taxation host country has the right of taxation 12

IV. Art. 15 OECD-Model: Employer in the meaning of the treaty The Economic Employer-approach • If an employee is resident in the home country and works for an associated company domiciled abroad (or vice versa), it must be considered which of these companies should be deemed the employer within the meaning of the DTT (= Economic Employer), on the basis of economic content and actual implementation of the underlying agreements. • Simplification Rule according to the German Ministry of Finance: If an assignment is not exceeding three month (spread over the year for objectively related work), the foreign company is generally not deemed the Economic Employer, because the employee can not be considered as integrated into the host company. 13

IV. Art. 15 OECD-Model: Employer in the meaning of the treaty The host company is generally deemed the Economic Employer, when • it bears the labour costs or would have been obliged to bear them according to the arm’s-length-principle, and • the assignment was arranged at the host company’s instigation and exclusively or predominantly on its own interest, and • the employee is integrated into the host company, and • the employee has to follow the host company’s instructions. 14

IV. Art. 15 OECD-Model: The Dependent Personal Service Article please note: o If the treaty gives the host country the right of taxation, only the part of the remuneration that is associated with work days in the host country can be taxed by the host country. o Be careful with bonus-, holiday-payments etc. which can not directly associated. o If necessary, allocation of remuneration according to actual work days in home and host country, if not directly associated. 15

IV. Art. 15 OECD-Model: Scheme Is the expat present in the host country for a period exceeding 183 days in a 12 -month-period? Yes No Is the remuneration paid by, or on behalf of, an employer residing in the host country? Yes No Is the remuneration borne by a permanent establishment in the host country? Yes No home country has the right of taxation host country has the right of taxation 16

V. Art. 23 OECD-Model: Methods for Elimination of Double Taxation Article 23 OECD-Model provides two methods for the elimination of double taxation which needs to be applied by the residence country: Tax Exemption Method • Under the tax exemption method, the residence country exempts certain income from tax when assessing final taxes. However, the treaty can allow the home country to consider the exempted income for determining the tax-rate (progressive effect) • Exemption method might be already applicable for payroll and wage-tax-purposes (depending on the country) The Tax Credit Method • Under the credit method, the residence country credits foreign tax against the national income tax. Foreign tax credits can bring national taxes to zero. (Worldwide the credit methods dominates) • Problem: Depending on the involved countries the credit method might not avoid temporary double taxation during the tax year as crediting of foreign taxes is only done when filing or assessing annual income taxes. 17

VI. Excursion: Avoidance of Double Taxation in Germany • Germany generally intends the tax exemption method, but takes the exempted income into account in the determination of the final tax rate (progressive effect). Currently one DTT signed by Germany (UAE) requires credit method) • Provided that the exemption method can be applied, the employer can file an application for the exemption of the wage tax deduction at the responsible tax office. • In the case of non-DTT Countries: o tax credit method, or o work related deductions in the individual income tax return (less relevant for employees as in most cases not advantageous o For construction-, assembly, and development assistant activities: under certain conditions tax-exemption applicable (with progressive effect) 18

VI. Excursion: Avoidance of Double Taxation in Germany Proof of taxation abroad necessary: • Since 2004, it must be observed under § 50 d, para. 8 German Income Tax Act that the tax-exemption for the employment income granted in a DTT only apply for taxpayers with unlimited tax liability (=residents) if the employee proves that the country with the right of taxation under the DTT (Country in which the work is carried out) has waived its right of taxation or that the taxes on the employment-income in said country has been assessed and paid. 19

VII. Case Study Case 1: • • An employee, married one child is assigned for 2 years (Jan 1, 2011 – Dec 31, 2012) to subsidiary company (=host company) in your country (=host country) Employee rents a flat in host country Spouse and child remain in home country Host country runs payroll (if possible according legislation of host country) and bears the labour costs Alternative Case (2): • • Same as case 1 but: Assignment for 5 months (Jan 1, 2011 – April 30, 2012) Home company runs the payroll, but labour costs are recharged to host company 20

VII. Case Study Questions: • Is the employee subject to taxation in the host country according to domestic tax law (resident, non-resident, or even not taxable)? • What do you think is the employee’s resident country in the meaning of the DTT? • Is the employment income taxable in the host country according to the DTT? • Is the (host) company obliged to withhold wages taxes? If not, can they opt for? • Are there other important regulations in your country which are relevant to case one or two? 21

Contact Björn Spilles, Dipl. -Kfm. (FH) Senior Assistant, Member of task force „NEXIA-Global Mobility Tax Services“ Tel: +49 (0) 228 81000 -70 • E-Mail: bjoern. spilles@dhpg. de DHPG Dr. Harzem & Partner KG Wirtschaftprüfungsgesellschaft Steuerberatungsgesellschaft D-53175 Bonn • Godesberger Allee 125 -127 • www. dhpg. de 22