Germany’s Federal Council approved the Annual Tax Act 2024 on 22 November 2024 and the law was published in the Federal Law Gazette on 5 December 2024. The changes enacted by the act, including an increase in the social security contributions and a new understanding of the tax treatment of income received during “garden leave” therefore have entered into force.
German employees must pay social security contributions on their gross income for pension, unemployment, health, and long-term care insurance purposes. However, the income on which social security contributions are paid is capped, and no social security contributions are payable above that limit, referred to as the contribution assessment ceiling.
Effective 1 January 2025, the contribution assessment ceiling for statutory health insurance will increase to EUR 66,150 annually or EUR 5,512.50 per month, from EUR 62,100 annually or EUR 5,175 monthly in 2024. Thus, employees will pay higher contributions to German social security in 2025.
The contribution assessment ceiling for statutory pension insurance also rose significantly for 2025, and– for the first time, it was set at the same level throughout Germany, at EUR 8,050 per month. In 2024, the limit in the new federal states was EUR 7,450 per month, compared to EUR 7,550 in the old federal states.
According to the commentary to the OECD Model Tax Convention, remuneration received by an employee who has been released from employment for the period prior to the termination is taxed in the state in which the work would have been carried out had the release not occurred. By contrast, under Germany’s previous interpretation, this salary could generally be taxed only in the employee's country of residence if the revocable release from work duties did not result in the employee performing any work. The Annual Tax Act aligns the German legal understanding of this situation with the commentary on Art. 15 of the OECD Model Tax Convention.
If a double taxation agreement contains a provision expressly addressing this type of remuneration, the new interpretation will not be applicable, and the treaty’s provision must be followed.
This will already apply for the 2024 tax assessment period.
Christiane Anger
BDO in Germany
Social Security Contribution Assessment Ceiling
German employees must pay social security contributions on their gross income for pension, unemployment, health, and long-term care insurance purposes. However, the income on which social security contributions are paid is capped, and no social security contributions are payable above that limit, referred to as the contribution assessment ceiling.Effective 1 January 2025, the contribution assessment ceiling for statutory health insurance will increase to EUR 66,150 annually or EUR 5,512.50 per month, from EUR 62,100 annually or EUR 5,175 monthly in 2024. Thus, employees will pay higher contributions to German social security in 2025.
The contribution assessment ceiling for statutory pension insurance also rose significantly for 2025, and– for the first time, it was set at the same level throughout Germany, at EUR 8,050 per month. In 2024, the limit in the new federal states was EUR 7,450 per month, compared to EUR 7,550 in the old federal states.
Salary Received During “Gardening Leave”
According to the commentary to the OECD Model Tax Convention, remuneration received by an employee who has been released from employment for the period prior to the termination is taxed in the state in which the work would have been carried out had the release not occurred. By contrast, under Germany’s previous interpretation, this salary could generally be taxed only in the employee's country of residence if the revocable release from work duties did not result in the employee performing any work. The Annual Tax Act aligns the German legal understanding of this situation with the commentary on Art. 15 of the OECD Model Tax Convention.If a double taxation agreement contains a provision expressly addressing this type of remuneration, the new interpretation will not be applicable, and the treaty’s provision must be followed.
This will already apply for the 2024 tax assessment period.
Christiane Anger
BDO in Germany