Global Employer Services News April 2021

Limited taxation and tax filing requirement

Tax Filing requirement resulting in Higher Tax Burden

Before the “Annual Tax Act 2019 (Jahressteuergesetz 2019) the income tax of an employee who has no dwelling or no habitual abode in Germany (subject to limited taxation) was generally deemed to be settled with the deduction of the wage tax pursuant to § 50 (2) German income tax act.

According to the new legislation an employee with limited tax liability now must file a personal income tax return from 2020 onwards if among others the employer has calculated the wage tax on employment income for activities lasting several years (more than 12 month) or a severance payment according to the so-called "one-fifth rule".

The new regulation will basically lead to a higher tax burden due to the so called “progression clause”.


An employee resident in UK and non-resident in Germany is working for a German employer. The income related to German workdays is taxable in Germany. The employment income related to workdays outside of Germany is tax-free in Germany. The employee receives stocks from his employer due to an ESPP. The period between grant and exercise exceeds 12 months. The benefit in kind taxable in Germany amounts to 47,000 EUR and the tax-free foreign income to 500,000 EUR.

The German employer has the obligation to calculate the German wage tax withholding under the so called “one-fifth rule”. According to the previous legal situation, the wage tax amounting to 0 EUR will simultaneously be the final income tax burden.

However, due to the new regulation from 2020 onwards, an assessment for income tax must be made, in which the foreign amount of 500,000 EUR must also be taken into account to calculate the tax rate applicable to the taxable income (exemption with progression). This will result in a tax burden of approx. 20,000 EUR.

The question arises, whether the new legislation may raise constitutional concerns since there is now an unequal treatment of wages within the limited tax liability. While the employee subject to limited taxation who receives a payment/benefit in kind for several years or a severance payment is obliged to file a tax return and may suffer higher taxes due to the progression clause, an employee with limited tax liability who only receives an annual bonus for a period not exceeding 12 months has no tax return filing obligation. The wage tax withholding will be final. In the above example the tax burden for a bonus not subject to the “one-fifth rule” will amount only to approx. 11,000 EUR because the progression clause is not applicable.


Since the employer is obliged to check whether the “one-fifth rule” leads to lower wage tax withholdings, he cannot waive the application of this rule. Therefore, the employer might reconsider whether the vesting period for certain special payments/BIK must exceed 12 months.

Wolfgang Kloster

Sevim Weller